Lecture 8: Posterior-Separable Cost Functions and Behavior

In this lecture, I introduce and analyze behavioral patterns associated with a large and important family of attention cost functions. Costs based on Shannon entropy introduced into economics by Sims opened the door. In this lecture, I introduce this cost function and indicate some of the many reasons why generalizations are being explored. In a nutshell, the model has properties that are often contradicted in data. With that in mind, I introduce some seemingly natural generalizations that share a key property of the Shannon model, which is posterior separability: Costs are additive in nature in a particular sense. These are now well studied due to their allowing for most observed empirical failings of the Shannon model…