Business Intelligence

Rational Inattention To Discrete Choices: A New Foundation For The Multinomial Logit Model

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Executive Summary

Often, individuals must choose among discrete alternatives with imperfect information about their values, such as selecting a job candidate, a vehicle or a university. Before choosing, they may have an opportunity to study the options, but doing so is costly. This costly information acquisition creates new choices such as the number of and types of questions to ask the job candidates. The authors model these situations using the tools of the rational inattention approach to information frictions (Sims, 2003). They find that the decision maker's optimal strategy results in choosing probabilistically exactly in line with the multinomial logit model.

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