Our inattention is worth its weight in gold, economist Filip Matějka has shown
Why do we prefer to buy a less advantageous product and vote for populists? Why do companies discriminate systematically? According to the economist and Neuron Award laureate Filip Matějka, the answer is offered by the theory of rational inattention. In a lecture at CERGE-EI, held in cooperation with the Neuron Foundation, he explained that attention is a scarce resource and that our decisions about what to devote it to have fundamental economic consequences.
We are not irrational, merely "sophisticatedly limited"
The theory of rational inattention unifies classical and behavioural economics. We are not stupid, but "sophisticatedly limited". Since we cannot process all the information, we rationally choose what to ignore.
That gives simplicity enormous economic value. People prefer to avoid complexity even when it could bring them profit. A well-known experiment showed, for instance, that people choose more easily from five varieties of a product than from 30. When something is too complicated we perceive it as a risk. Matějka illustrated this with people's reluctance to engage with complicated insurance contracts.
Discrimination as the allocation of attention
Filip Matějka's research showed that discrimination need not be merely an unconscious automatic reaction but a rational allocation of attention. When looking for the ideal job candidate, employers devoted less attention to CVs with the names of people from minorities and invited them to interview less often. Conversely, when letting a flat, landlords devoted more attention to those names, seeking detailed information about them in order to avoid a potentially "problematic tenant".
The result was therefore systematically negative for minorities in both cases.
Democracy's weak point: why is the "bear carved up"?
Rational inattention also explains democracy's failings. Voters logically pay attention only to the issues that affect them personally. Politicians respond to that, and it is easier for them to promise better pay to a small but attentive group than to push through, say, an education reform whose benefits are diffuse.
That gives rise to the "carving up of the bear", in which the budget is handed out to particular interests, while key common goods such as the education just mentioned are underfunded.
Filip Matějka's conclusion is clear: decentralised systems, such as the market, work better. As a "parallel computer" they make use of local knowledge that a "central planner" could not pay attention to. Systems — from tax reforms to product design — have to be designed with our cognitive limits in mind. Simplicity and clarity are not a luxury but a functional necessity.
Research into rational inattention, which is pushing back the boundaries of world economics, is exactly the kind of top-class science we try to support at the Neuron Foundation. We are glad to have been able to contribute to spreading ideas with such a fundamental impact on our understanding of society, politics and everyday decision-making.
