Directed attention and nonparametric learning

Ian Dew-Becker*, Charles G. Nathanson

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

This paper examines the implications of learning for the effects of ambiguity aversion. The key result is that since agents naturally choose to learn about the sources of uncertainty that reduce utility the most, information acquisition attenuates the most severe effects of ambiguity aversion. The specific setting we study is the canonical consumption/savings problem. Agents endogenously learn most about income dynamics at the very lowest frequencies. While ambiguity aversion typically implies in this setting excessive extrapolation of income shocks, that effect is eliminated here. Furthermore, deviations of consumption from the full-information benchmark are largest at high frequencies, so the model naturally generates overreaction of consumption to predictable short-run income variation.

Original languageEnglish (US)
Pages (from-to)461-496
Number of pages36
JournalJournal of Economic Theory
Volume181
DOIs
StatePublished - May 2019

Keywords

  • Ambiguity aversion
  • Consumption
  • Frequency domain
  • Learning

ASJC Scopus subject areas

  • Economics and Econometrics

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