A Model of Mental Effort and Endogenous Estimation Risk

Abstract

I present a simple model that formalizes Kahneman's (1973) ideas and experimental work on attention limitations. In addition, I extend his framework to account for the interaction between attention and memory deficits. In particular, I propose that individuals optimally allocate their divisible, but limited, attention to estimate parameters of an economic model, by retrieving observations from a stock of memories, by means of a cognition technology. I speculate that the model might help explain several stylized facts that are at odds with an infinite capacity (fully rational) model.