Top–down and bottom–up information acquisition: Application to financial markets

Recent studies confirm the main prediction of the rational inattention framework that the perceived value of information (top–down) as a key driver of attention. However, these investigations also report stimulus-driven salience effects (bottom–up) that counteract the framework’s predictions. In this manuscript, I propose an extension to the standard rational inattention model by incorporating bottom–up attention processes such as salience-effects through varying information processing costs. Applied to asset pricing with a representative agent a higher information salience generally reduces the cost of information processing (attention) needed for the same level of uncertainty reduction. Due to a substitution effect in the attention allocation across information, an attention-maximizing salience emerges. In general, a higher information salience consistently enhances asset price informativeness.