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The B.E. Journal of Theoretical Economics

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Limited Attention as the Bound on Rationality

Sharon Gifford1

1Rutgers University,

Citation Information: Contributions in Theoretical Economics. Volume 5, Issue 1, ISSN (Online) 1534-5971, DOI: 10.2202/1534-5971.1108, December 2005

Publication History

Published Online:
2005-12-05

A utility maximizing model of allocating limited attention between adopting new behaviors and adapting current behaviors generates an optimal policy that resembles commonly observed, and apparently irrational, behavioral rules. The ability to update current behaviors implies an endogenous opportunity cost of adopting a new behavior. If this cost is sufficiently high, then behaviors are less than substantively rational. However, if this high cost of attention is ignored, then behaviors are less rational than if this cost is considered. This is because more rational behaviors are updated less frequently and so economize on attention in the future.

Keywords: bounded rationality; limited attention; behavioral rules; decision making

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[1]
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[2]
SHANE A. CORWIN and JAY F. COUGHENOUR
The Journal of Finance, 2008, Volume 63, Number 6, Page 3031

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