← Search

Review of Economic Studies Vol. 86 No. 6 2019

Discrete Actions in Information-Constrained Decision Problems

Junehyuk Jung1; Jeong Ho Kim2; Filip Matějka3; Christopher A. Sims4

1 Department of Mathematics, Texas A&M University · 2 Department of Economics Emory University · 3 CERGE-EI, A joint workplace of the Center for Economic Research and Graduate Education, Charles University, and the Economics Institute of the Academy of Sciences of the Czech Republic. Politickych veznu 7 Prague 11121, Czech Republic · 4 Department of Economics Princeton University

Abstract

Individuals are constantly processing external information and translating it into actions. This draws on limited resources of attention and requires economizing on attention devoted to signals related to economic behaviour. A natural measure of such costs is based on Shannon’s “channel capacity”. Modelling economic agents as constrained by Shannon capacity as they process freely available information turns out to imply that discretely distributed actions, and thus actions that persist across repetitions of the same decision problem, are very likely to emerge in settings that without information costs would imply continuously distributed behaviour. We show how these results apply to the behaviour of an investor choosing portfolio allocations, as well as to some mathematically simpler “tracking” problems that illustrate the mechanism. Trying to use costs of adjustment to explain “stickiness” of actions when interpreting the behaviour in our economic examples would lead to mistaken conclusions.

DOI
10.1093/restud/rdz011
Volume
86
Issue
6
Pages
2643-2667
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite