Rational inattention theory is economic theory that recognizes that people have finite information-processing capacity …, in the sense of Shannon and engineering information theory. This approach is still in the early stages of development … macroeconomics and finance. In this chapter we introduce the basic ideas of information theory, show how it can be introduced …

of the theory: 1) Subjects optimally make stochastic consumption choices; 2) They respond to incentives and changes in …