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The focus of attention is important in financial markets. The markets used to focus on the money supply; today it is world financial markets and the trade and budget deficits. Market participants always watch the DowJones Index and the various support levels—there are Federal Reserve watchers and dollar watchers. There are fads (see, for example, Shiller 1984) in which investors become interested in particular companies or sectors of the economy, just as in the academic world some research areas are ‘hotter’ than others. Agents pay attention to these at the expense of others. It may be said that a market is efficient when all factors get paid the ‘appropriate amount’ of attention, though this can be a more or less problematic notion depending on how much the attention itself affects the outcome. In any case, there can be bias in the perspective of the aggregate when, for example, a fad captures all the attention.3

I have argued that utility and technology are constituted by knowledge, and that attending to utility and cost functions can change them. What can it mean for such functions to be the objects of ‘common knowledge’, as is frequently assumed by economists? Common knowledge requires a joint focus of attention, which means that communication has taken place. Common knowledge cannot be assumed without explicitly detailing the actual communicative practices in an economy. When the economy is viewed in this way, the importance of the public media (and public space) becomes apparent. For example, we can start to think about the role of advertising more intelligently, considering its influence on society.

Why is that important for economics? Because there is a social context in which humans live and act. Game theorists and experimental economists are coming to realize that context matters. Focal points are being studied in game theory (Schelling 1960; Kreps 1984; Shubik 1985; Myerson 1986) in order to see how context determines which of several equilibria may be chosen. In experimental economics, Alvin Roth (1986, p. 254) has found that attention focus explains more than risk aversion, in concert with the findings of March and Shapira (1987). Preference-reversal phenomena (see, for example, Tversky et al. 1988) also show that questions of risk aversion cannot be taken out of context.

We are studying situated rationality—intelligent agents engaged in the world. What economics often studies is economists engaged in the world. Here Arrow (1986, p. 207) writes: ‘We have the curious situation that scientific analysis imputes scientific behavior to its subjects.’ The possibilities for infinite regress are apparent. Economic agents are assumed to use the latest econometric techniques in learning about the objects in the economy. We must study economic agents attending to their worlds, not economists.

IMPLICATIONS FOR ECONOMIC ANALYSIS

The question inevitably arises as to how economic analysis would be done differently if attention were taken seriously. There have been some instances (for example, Radner and Rothschild 1975; Winter 1982) where economic models

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have been developed which explicitly detail the attention-allocation process, but it cannot be explained as the result of optimizing behaviour with respect to ‘given’ objects such as utility and cost functions. For how is the allocation of attention to expected utility maximization itself to be explained? Economic analysis cannot reduce the movement of attention to the result of calculated choice, for this movement emanates from the intersubjective realm—the context in which atomistic action takes place.

Now it is argued that people do not actually go through expected utility calculations prior to every action; they just act as if they do. Economic models are metaphors which select the most important aspects of human action and thus enable insight into an otherwise hopelessly complex world. Good enough. We must ask, however, with Mirowski (1987), a key question - how good is the metaphor? Consider Friedman’s (1953) billiard player. He acts as if he knows the appropriate laws of physics, and his activity could be described by way of sophisticated mathematical operations. But this billiard player is an expert who has invested years of high-intensity attention into the game. How would we describe the play of the novice? He may be no less rational than the expert, but he has responded over the course of his life to other demands on his attention. The metaphor does not work so well here. It is always necessary to look to the attentional deployment of the agents in order to determine goodness of fit.

Herbert Simon has been asking economists to pay attention seriously for years. He has recently (1984) argued that economic models invariably rely on auxiliary assumptions when they are applied to particular settings (see also Arrow 1986, and Mirowski 1987). These models implicitly assume that agents attend to all relevant variables, no matter how many. This may be acceptable if the number of variables is small, and if they do not change without being noticed; but the point is that ‘attentional mechanisms are critical to the quality of… rationality’ (Simon 1984, p. 48). Simon calls for an empirical study of attention and shifts of focus in order to develop a theory of individual and social determinants of attentional deployment.

The economics profession has obviously not taken Simon’s advice to heart. Nevertheless, it is possible—by using what is already known about attention—to judge the adequacy of model assumptions in various applications, and to favour one approach over another. Given the underdetermination of theories by ‘the data’, this would provide another perspective for assessment. Although attention allocation cannot be explained by the standard tools of economic analysis, it is possible to assume a particular attentional deployment and then apply the most appropriate tools so long as the realm is sufficiently delimited for atomistic analysis to apply. In the spirit of general equilibrium analysis, the total nexus of demands on attention should be taken into consideration.

Consider for example, economic theories of advertising. Milgrom and Roberts (1986) have explained the existence of advertising which appears to have little or no information content by way of a model in which both price and advertising expenditures serve as signals of quality. They conclude that under some cost

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structures the existence of the advertising signalling alternative results in a Pareto-improvement. Consumers are assumed to know which regions of price and advertising space correspond to credible signals on the part of high-quality producers. For Schmalensee (1978), on the other hand, consumers behave adaptively, and relative advertising expenditures determine the probabilities that they will switch products. Perverse outcomes may result in which the poorest quality firms advertise the most and are the most successful, due to consumers’ lack of awareness of firms’ incentives. Policy recommendations clearly differ with the two approaches. An understanding of attentional realities may provide some insight here.

Milgrom and Roberts (1986) give the example of the advertising campaign introducing Diet Coca-Cola, in which the clearest message (in their eyes) is ‘We are spending an astronomical amount of money on this ad campaign’. All that matters is the level of advertising expenditures. Consumers infer quality from price and advertising levels, with the supposed minimal information requirement that they know which regions of priceadvertising space correspond to credible signals of high quality. But it must be asked how such knowledge is to be acquired. Is an intuition developed as a result of exposure to many similar such situations? Milgrom and Roberts show how complex the relationship is between price-advertising signals and underlying cost structures. Do consumers acquire a sense for a correlation between certain cost structures and products, and therefore the priceadvertising regions associated with those products?

The potential applicability of such a metaphor cannot be completely dismissed out of hand. In order to make a judgement, it is necessary to investigate the attentional deployment of consumers watching Diet Coke commercials. Suppose consumers were all well trained in economic theory and were therefore interested in firms’ incentives. Of course, if this was post-Nelson (1974) but pre-Milgrom and Roberts (1986), they might only be focusing on the level of advertising expenditures. So let us assume that some theory—such as that of Milgrom and Roberts—has induced consumers to focus on both price and advertising levels, and that firms act as if they believe consumers are doing so and therefore provide the appropriate priceadvertising signals. Then, after long years of careful attention to many products and their associated prices, advertising expenditures, and quality levels, it could very well be the case that consumers develop the corresponding intuitions if firms act all along as if they believe consumers have already developed them.

Notice that it is necessary to make auxiliary assumptions such as these in order to justify the application of the model. Implausible as they are in today’s situation, it cannot be asserted that they would never be satisfied. Who knows what sorts of fads can capture the attention of the public and turn its fickle interest in such a direction? This is the very realm of the intersubjective, the social context which cannot be explained by standard atomistic economic analysis, but must be assumed as the historical situation.

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With respect to the applicability of the model to today’s consumers, we must ask what sort of attention consumers actually pay to Diet Coke commercials. The situation is quite different from that of the billiard player. There it is clear that the focus should be on the balls, pockets, available cue strokes, and the context of the game at hand. The consumer, on the other hand, is attending to a social reality open to a wide range of perspectives. The choice of price-advertising signals as the unambiguous salient object is far from evident. This first phase in the choice process in which decisions are ‘framed’ (Tversky and Kahneman 1981) is crucial; it determines the agent’s perspective and resultant interpretation of the situation. The academic observer’s focus on price-advertising variables is no reason to assume that real-world agents will or should do so.

The question remains, how indeed is the attention of the typical consumer deployed while watching the Diet Coke commercial? Advertisers are interested in this question. In fact, most, if not all, of the content which Milgrom and Roberts claim is pointless is devoted to attracting the viewer’s attention in order to ensure the highest degree of effectiveness per advertising dollar. It is fair to assume that given the other demands in their lives, most consumers pay little critical attention to the presentation. They are passively relaxing at home after spending a long day attending to their particular area of expertise at the job. Advertisers, on the other hand, pay a great deal of attention to the design of the commercial. It is hardly irrational that these firms hire psychologists well trained in the intricacies of attention attraction. The dancers and celebrities in the Diet Coke commercial all function to capture the attention of the viewer, with the eventual aim that a favourable feeling, quite unarticulated, will be evoked with respect to the product in a potential purchasing situation.

If Milgrom and Roberts’ view of the world is correct, only the level of expenditure on the advertisement is important. If this is the case, then there surely are better ways to inform the public as to the exact amount spent. After all, if there is some uncertainty in this regard, the high-quality firm may lose some customers who underestimate expenditures. One approach would be to have a representative from Arthur Andersen announce the amount spent during the actual presentation of the advertisement, while the attention of the viewer is still engaged. This would ensure full credibility. Of course, if consumers were as sophisticated as Milgrom and Roberts would like them to be, these ‘dissipative signals’ would seem to be irrational; why not demonstrate through the appropriate experts and channels of communication the attributes which ensure that the product is of the highest quality?

Just as Milgrom and Roberts overestimate the attention that consumers pay to commercials, they underestimate the intelligence of the advertisers in designing them. Schmalensee’s (1978) model, on the other hand, has the right balance in modelling sophisticated firms and adaptive consumers. By way of this sort of analysis it is possible to gain insight into firms’ strategies and market outcomes. It allows an approach to the question of the social desirability of various forms of

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advertising. Is it possible that some advertisers may be guilty of polluting the social environment?

In the above analysis it was not possible to reject Milgrom and Roberts’ assumptions on a priori grounds. However, there are some instances in modern economic theory in which the assumptions stretch credibility to such extremes that it is virtually impossible to imagine any conditions in which they could be justified. Consider Robert Townsend’s (1987) study of economic organization and limited communication. Townsend conducts a ‘formal, stylized’ study of how communication matters in economic systems. Agents transmit privately observed information by way of communication-accounting systems which are varied in order to study how incentive compatibility constraints and resultant outcomes are affected.

Townsend assumes that each agent’s preferences are characterized by stochastic utility functions. This in itself might be defensible in some applications, given the vagaries of the winds of social influence. However, he goes on to assume that the range of values which these utility functions may take on, along with the associated probabilities, are common knowledge to all agents! Only the specific realizations are private information which is to be transmitted to all other agents. The probabilities must be known in order to construct the incentive-compatibility constraints which ensure truthful announcements of the privately observed shocks to preferences. It seems strange that all agents have somehow learned the probabilities associated with these unobservables—which allow the construction of the incentive-compatibility constraints, which allow agents to learn the true values of the unobservables, which would in turn allow them to estimate the probabilities necessary to construct the incentivecompatibility constraints. Could it be that Townsend is in a hermeneutical circle?

Perhaps everyone is born knowing the distribution of all other agents’ utility functions. Or perhaps this is just a metaphor—social realities are such that people act as if they have such knowledge. In order to assess the metaphor, it is necessary to inquire into the requirements on the associated attentional deployment which would lend it credibility. Putting aside for the moment Townsend’s assumption that the utility-function realizations are not ‘publicly observable’, what would lead agents to focus on these events? How would the events change as a result of such a public shift of focus? Questions such as these must have been addressed before the model could ever be applied in a real-world situation and could yield some insight into how communication matters. Townsend gives an example in which the values of the utility function correspond to times when the agent is more or less ‘patient’ or ‘urgent’. It is most difficult to imagine any circumstances in which all agents could agree on the ‘true, objective probability’ of such events taking place. What Townsend does not understand is that there are no brute data in social realities; for all observations must be interpreted through the medium of attention/language. Since they are partly constituted by articulation, states of patience and urgency are not subject to neutral observation by disinterested observers. It is difficult to