Rational Attention and Adaptive Coding

Rational Attention and Adaptive Coding are two theories, developed in very different disciplines that try to explain very similar phenomena. Rational Attention is crucial in explaining important factors in the economic life of a country: for instance, in explaining how people respond to changes in prices, and why and how monetary policy is effective. Rational Attention is currently based on an ad hoc, ultimately weak and unsatisfactory theory of human decision making. Thus, we may be relying on a faulty theory to formulate essential policy decisions like monetary policy. Our proposal wants to provide a sound basis to the theory explaining what people pay attention to. To do so, it will apply to economic decision making the theory of Adaptive Coding, developed in Neuroscience, which explains how the brain adjusts to the environment to maximize the perception accuracy. For example, when one goes from a very bright outside into a dark room, his retina and brain adapts to the new intensity.

Rational Attention and Adaptive Coding pose a puzzle. The adaptation to the environment has the functional reason of using optimally information processing, but the adjustment introduces the possibility that environment biases choice. Three questions are the core of our proposed research: 1.What is the trade- off between the improvement in decision making and the bias? 2. If a bias is introduced, how is it corrected? 3. If correction requires time, what is the speed of the correcting mechanism? Our proposal will provide answers to the three questions, using a new and transformative method in the analysis of economic decision making, aimed at producing a fully mechanistic model of choice. In a mechanistic model there is a one-to-one correspondence between the variables in the model and the variables we measure in experimental analysis.