Rational Inattention and Choice Under Risk: Explaining Violations of Expected Utility Through a Shannon Entropy Formulation of the Costs of Rationality

We propose a model of stochastic choice in which the error term is derived from a maximizing framework in which it is costly for agents to make decisions optimally. We argue that the model has testable implications, and is closely related to other models used in the literature on choice under risk. We test this model over experimental data, replicate some conclusions of the existing literature, and show our model to perform well against models in the field in current use.

Maxim L. PinkovskiyEmail: