Rationally Inattentive Behavior: Characterizing and Generalizing Shannon Entropy

Andrew Caplin, Mark Dean, John Leahy

    Research output: Contribution to journalArticlepeer-review


    We introduce three new classes of attention cost functions: posterior separable, uniformly posterior separable, and invariant posterior separable. As with the Shannon cost function, all can be solved using Lagrangian methods. Uniformly posterior-separable cost functions capture many forms of sequential learning and hence play a key role in many applications. Invariant posterior-separable cost functions make learning strategies depend exclusively on payoff uncertainty. We introduce two behavioral axioms, Locally Invariant Posteriors and Only Payoffs Matter, which identify posterior-separable functions as uniformly and invariant posterior separable, respectively. In combination, they pinpoint the Shannon cost function.

    Original languageEnglish (US)
    Pages (from-to)1676-1715
    Number of pages40
    JournalJournal of Political Economy
    Issue number6
    StatePublished - Jun 2022

    ASJC Scopus subject areas

    • Economics and Econometrics


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