Implications of rational inattention

Sims, Christopher A.

doi:10.1016/s0304-3932(03)00029-1

Cited by 2,910 publications

(2,297 citation statements)

References 8 publications

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“…"Rational inattention" theory, as proposed by Sims (1998Sims ( , 2003Sims ( , 2006, rationalizes the choice behaviour of decision-makers who choose their preferred amount of information and allocation of attention, when all options and information pertaining to them are fully available, but attending to and processing this information is costly (i.e. information frictions).…”

Section: Literature Reviewmentioning

confidence: 99%

“…Following the works of Sims (1998Sims ( , 2003Sims ( , 2006, the rational inattention literature assumes that customers process information through channels with limited capacity. Accordingly, the cost of information is given by C(F ) = λκ, where λ is the unit cost of acquiring and processing information that the customer deems useful (simply referred to as cost of information hereon), and κ is the amount of information processed.…”

Section: Customer Choice Under Limited Attentionmentioning

confidence: 99%

“…1 At the core of rational inattention is the understanding that attention is a scarce resource and therefore must be allocated wisely. In particular, the pioneering works of Sims (1998Sims ( , 2003Sims ( , 2006 propose a framework that is based on a stream of literature on information theory, which measures uncertainty by entropy and quantifies information as reduction in uncertainty. This approach does not make particular assumptions on how decision-makers acquire information and what they learn.…”

Section: Introductionmentioning

confidence: 99%

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Pricing When Customers Have Limited Attention

Boyacı

Akçay

2016

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means -electronic, mechanical, photocopying, recording, or otherwise -without the permission of ESMT. Terms of use: Documents inFind more ESMT working papers at ESMT faculty publications, SSRN, RePEc, and EconStor. Submitted to manuscript (Please, provide the mansucript number!)Authors are encouraged to submit new papers to INFORMS journals by means of a style file template, which includes the journal title. However, use of a template does not certify that the paper has been accepted for publication in the named journal. INFORMS journal templates are for the exclusive purpose of submitting to an INFORMS journal and should not be used to distribute the papers in print or online or to submit the papers to another publication. (90) 212 338 1393 yakcay@ku.edu.tr Pricing When Customers Have Limited AttentionWe study the optimal pricing problem of a firm facing customers with limited attention and capability to process information about the value (quality) of the offered products. We model customer choice based on the theory of rational inattention in the economics literature, which enables us to capture not only the impact of true qualities and prices, but also the intricate effects of customer's prior beliefs and cost of information acquisition and processing. We formulate the firm's price optimization problem and characterize the pricing and revenue implications of customer's limited attention. We test the robustness of our results under various modelling generalizations such as prices signalling quality and customer heterogeneity, and study extensions such as multiple products, competition, and joint inventory and pricing decisions. We also show that using alternative pricing policies that ignore the limited attention of customers or their ability to allocate this attention judiciously can potentially lead to significant profit losses for the firm. We discuss the managerial implications of our key findings and prescribe insights regarding information provision and product positioning.

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Section: Literature Reviewmentioning

confidence: 99%

Section: Customer Choice Under Limited Attentionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Pricing When Customers Have Limited Attention

Boyacı

Akçay

2016

SSRN Journal

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“…The AMF method also has some of the flavor of the rational inattention concept of Mankiw and Reis (2002) and Sims (2003) who justify relaxing the information burden of rational expectations on the grounds that agents update their information infre-quently and agents have limited information-processing capacity. We use this type of assumption in the AMF method in order to streamline computation time.…”

Section: Relax Rational Expectations: Alternate Model Forecastmentioning

confidence: 99%

OLG Life Cycle Model Transition Paths: Alternate Model Forecast Method

Evans

Phillips

2012

SSRN Journal

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The overlapping generations (OLG) model is an important framework for analyzing any type of question in which age cohorts are affected differently by exogenous shocks. However, as the dimensions and degree of heterogeneity in these models increase, the computational burden imposed by rational expectations solution methods for non-stationary equilibrium transition paths increases exponentially. As a result, these models have been limited in the scope of their use to a restricted set of applications and a relatively small group of researchers. In addition to providing a detailed description of the benchmark rational expectations computational method, this paper presents an alternative method for solving for nonstationary equilibrium transition paths in OLG life cycle models that is new to this class of model. We find that our alternate model forecast method reduces computation time to 15 percent of the benchmark time path iteration computation time, and the approximation error is less than 1 percent.

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“…Em razão destes problemas, vários autores têm proposto o relaxamento de algumas premissas da HER ou, até mesmo, alternativas radicalmente diferentes no tratamento de expectativas nos modelos econômicos. Calvo (1983), Ball (2000), Sims (2001), Mankiw & Reis (2001), Calvo et al (2003), Woodford (2003), por exemplo, relaxam a premissa de informação perfeita. Alternativas mais radicais desvinculam a relação rígida entre modelo e expectativas dos agentes (Carroll, 2003;Frydman & Goldberg, 2003).…”

Section: Expectativas Racionaisunclassified

Leigos, expertos e formação de expectativa

Camargos

2011

Rev. Econ. Polit.

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Implications of rational inattention

Cited by 2,910 publications

References 8 publications

Pricing When Customers Have Limited Attention

Pricing When Customers Have Limited Attention

OLG Life Cycle Model Transition Paths: Alternate Model Forecast Method

Leigos, expertos e formação de expectativa

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