Rational Inattention and Perceptual Distance

TL;DR

This paper introduces a new measure for the cost of learning that accounts for varying perceptual distances, enabling more nuanced choice predictions and revealing a novel informational bias relevant for welfare analysis.

Contribution

It develops an axiomatic foundation for a flexible cost measure that incorporates multiple perceptual distances within a single environment.

Findings

Produces richer choice predictions

Identifies a new form of informational bias

Maintains tractability similar to Shannon's measure

Abstract

This paper uses an axiomatic foundation to create a new measure for the cost of learning that allows for multiple perceptual distances in a single choice environment so that some events can be harder to differentiate between than others. The new measure maintains the tractability of Shannon's classic measure but produces richer choice predictions and identifies a new form of informational bias significant for welfare and counterfactual analysis.