Rational Inattention and Perceptual Distance

Abstract

This paper uses an axiomatic foundation to create a new measure for the cost of learning that allows for multiple perceptual distances in a single choice environment so that some events can be harder to differentiate between than others. The new measure maintains the tractability of Shannon's classic measure but produces richer choice predictions and identifies a new form of informational bias significant for welfare and counterfactual analysis. The model also provides a new foundation for non-compensatory behavior, connecting the literatures on rational inattention and heuristic style choice rules. 1