Switching Cost Models as Hypothesis Tests

TL;DR

This paper establishes a theoretical link between switching cost models and hypothesis testing, showing that optimal inaction bands correspond to confidence intervals and two-sided tests in inference problems.

Contribution

It introduces a novel connection between switching cost models and hypothesis tests, demonstrating the equivalence of inaction bands to confidence intervals.

Findings

Inaction bands are equivalent to confidence intervals.

Optimal switching costs lead to hypothesis test interpretations.

The framework applies to inference problems with penalties for mistakes and switching.

Abstract

We relate models based on costs of switching beliefs (e.g. due to inattention) to hypothesis tests. Specifically, for an inference problem with a penalty for mistakes and for switching the inferred value, a band of inaction is optimal. We show this band is equivalent to a confidence interval, and therefore to a two-sided hypothesis test.