Rational inattention leads to irrational expectations

A recent Economic Letter from the Dallas Federal Reserve Bank (Vol. 6, No. 3, March 2011), written by Antonella Tutino, provides an alternative way of looking at gridlock in Congress and voting patterns in the U.S.

The Letter, “Rational Inattention Guides Overloaded Brains, Helps Economists Understand Market Behavior,” states that understanding how individuals perceive the economy is instrumental to policymakers’ efforts to achieve output and price stabilization. Rational inattention seems to be the inverse of rational expectations; the more rational inattention a consumer exhibits the less rational the expectations they demonstrate.

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