Keywords: Habit formation, Rational inattention
Abstract: When observable cues correlate with optimal choices, habit-driven behavior can alleviate cognition costs. We experimentally study the degree of sophistication in habit formation and cue selection. To this end, we compare lab treatments that differ
in the information provided to subjects, holding fixed the serial correlation of optimal actions. We find that a particular cue – own past action – affects behavior only in treatments in which this habit is useful. The result suggests that caution is warranted when modeling habits via a fixed non-separable utility. Despite this sophistication, lab behavior also reveals myopia in information acquisition.