Coordination and Continuous Choice

Modeling Imprecision in Perception, Valuation and Choice

“…Even more closely related are economic models that consider the optimal use of a finite range of possible classifications, such as those of Robson (2001), Rayo and Becker (2007), Netzer (2009), and Steiner and Stewart (2016). The latter kind of models, which are more consistent with evidence from psychophysics and neurophysiology, imply that "nearby" states must be difficult to distinguish from one another; this has important implications for the analysis of coordination games (Morris and Yang, 2019) and optimal contracting (Hébert and Woodford, 2018), among other issues. information.…”

Rational Inattention and Perceptual Distance

“…Perhaps as a response to the success Shannon Entropy has enjoyed, several recent papers have noted that Shannon Entropy may be a poor measure of the cost of acquiring information in some environments (Caplin, Dean, & Leahy, 2017;Morris & Yang, 2016) because it lacks what is called "perceptual distance" (Caplin et al, 2017, p. 39). As was alluded to previously, these papers argue that (i) more similar outcomes (outcomes that have less perceptual distance between them) should be more difficult to differentiate between, and (ii) when this property is missing, predicted behavior can differ signficantly from the type of behavior that it would seem natural to expect (Morris & Yang, 2016).…”

“…While other information cost functions do not require that choice behavior satisfies invariance under compression (Caplin et al, 2017;Morris & Yang, 2016), they lack the tractability and flexibility of Shannon Entropy, 5…”

“…Morris and Yang's (2016) intuition is that the cost of differentiating between two states should increase to infinity as the perceptual distance between them goes to zero. When two such states are on either side of a point where payoffs change discontinuously, Morris and Yang (2016) argue that the infinite cost of differentiating between states locally should result in an agent having the same behavior on either side of the point where payoffs jump.…”

Discrete Choice and Rational Inattention: A General Equivalence Result

“…In particular, they introduce a class of “neighborhood‐cost” functions, which allows them to reflect varying similarity of states to one another. Morris and Yang (2019) use ideas from global games to develop an RI framework, in which it is more difficult for players to distinguish between nearby states. Our results complement these, but instead of allowing cost functions to reflect that some states are more similar than others, we introduce cost functions that may reflect that some choice options are more similar than others that, as illustrated in the example above, are relevant for the empirical implications of the RI model.…”