papers in progress
Economic modelers have struggled with incorporating the limits of human memory into their models in ways that are tractable, realistic, and make good testable predictions about human behavior. In this paper, we bring together tools and results from neuroscience, coding theory, and the rational inattention literature in order to create a model of costly memory. In this model, players select costly memory plans which they use to retain information that they expect will be useful in the future. The plans are selected rationally in order to maximize expected payoffs from informed choices net the cost of the memory plan. We discuss both a general memory cost model and a more specific one based on storing information as strings of decaying bits. In the context of the general model, we consider how principals can profitably persuade agents using only the timing of information release. In the context of the coding based model, we show that rational memory with decay can predict a number of interesting economic phenomena. For example, events that occur close to elections have disproportionately large impacts on voting behavior. In insurance markets Kunreuther et al. (2013) describe the phenomenon of “insurance cycles”, whereby individuals buy insurance after a disaster, then let it lapse when no further disasters are forthcoming. We conclude the paper with a discussion of how the model can be enriched to be consistent with the psychological and neuro-scientific memory literature.
Experimental Tests of Rational Inattention (with Mark Dean)
We use laboratory experiments to test models of ‘rational inattention,’ in which people acquire information to maximize utility from subsequent choices net of information costs. We show that subjects adjust their attention in response to changes in incentives a manner which is broadly in line with the rational inattention model but which violates models such as random utility in which attention is fixed. However, our results are not consistent with information costs based on Shannon entropy, as is often assumed in applied work. We find more support for a class of ‘posterior separable’ cost functions which generalize the Shannon model.