International Finance Discussion Papers (IFDP)
May 2026
Attention Allocation and Belief Distortions
Abstract:
Using microdata from the Michigan Survey of Consumers, we study how within-household reallocations of attention across news affect inflation expectation bias, measured relative to a real-time, machine-learning full-information benchmark. Shifting attention toward unfavorable (favorable) economic news increases (decreases) forecast bias substantially, while dropping attention to an unfavorable topic has little effect. The largest bias increases come not from inflation news itself, but from attention to unfavorable social, political, and geopolitical narratives. Aggregate news sentiment has no effect on bias when a household's reported attention allocation is unchanged. In aggregate, these effects are amplified when the attention network is dominated by an unfavorable focal hub: bias-reducing favorable narratives are crowded out of limited attention sets, and respondents closer to the hub exhibit larger bias increases. We find that past and present attention to news together account for up to 70 percent of observed forecast bias, with the current attention component rising sharply during recessions and large negative news events. Results are robust to a battery of specification checks and external validation.
Keywords: Inflation expectations, limited attention, forecast bias, sentiment, networks
DOI: https://doi.org/10.17016/IFDP.2026.1438
PDF: Full Paper
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.