Directed attention and nonparametric learning

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 s...

Full description

Saved in:
Bibliographic Details
Published in:Journal of economic theory 2019-05, Vol.181, p.461-496
Main Authors: Dew-Becker, Ian, Nathanson, Charles G.
Format: Article
Language:English
Subjects:
Ambiguity aversion
Consumption
Frequency domain
Learning
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary: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.
ISSN:0022-0531
1095-7235
DOI:10.1016/j.jet.2019.03.004