Essays on Costly Information Acquisition in Economics

Essays on Costly Information Acquisition in Economics Vladimír Novák Abstract In the first chapter, we solve the two-armed bandit problem when decision-makers are risk-averse. We show - counterintuitively - that a more risk-averse decision-maker might be more willing to take risky actions. This finding relates to the fact that pulling the risky arm in bandit models produces information on the environment - thereby reducing the risk that a decision-maker will face in the future. Thus, we suggest there is reason for caution when inferring risk preferences from observed actions: in a bandit setup, observing a greater appetite for risky actions can be indicative of more risk aversion, not less. In the second chapter, we characterize when it is rational to acquire information leading to belief polarization, in situations that involve a choice between the implementation of a new policy with an uncertain outcome and the preservation of the status quo. Specifically, we model the agent to be rationally inattentive: any information about the new policy can be acquired before the choice is made, but doing so is costly. We show how the choice of information, and thus the belief formation, depends on the agent- specific value of the status quo. Importantly, beliefs can then, in expectations, update away from the..