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Bayesian Networks and Boundedly Rational Expectations

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  • Ran Spiegler

    ()
    (Tel Aviv University, Eitan Berglas School of Economics
    Centre for Macroeconomics (CFM))

Abstract

I present a framework for analyzing decision makers with an imperfect understanding of their environment’s correlation structure. The decision maker faces an objective multivariate probability distribution (his own action is one of the random variables). He is characterized by a directed acyclic graph over the set of variables. His subjective belief filters the objective distribution through his graph, via the factorization formula for Bayesian networks. This belief distortion implies that the decision maker’s long-run behavior may affect his perception of the consequences of his actions. Accordingly, I define a "personal equilibrium" notion of optimal choices. I show how recent models of boundedly rational expectations (as well as new ones, e.g. reverse causality) can be subsumed into this framework as special cases. Some general properties of the Bayesian-network representation of subjective beliefs are presented, as well as a "missing data" foundation.

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File URL: http://www.centreformacroeconomics.ac.uk/pdf/CFMDP2014-17-Paper.pdf
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Bibliographic Info

Paper provided by Centre for Macroeconomics (CFM) in its series Discussion Papers with number 1417.

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Length: 50 pages
Date of creation: Jul 2014
Date of revision:
Handle: RePEc:cfm:wpaper:1417

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Web page: http://www.centreformacroeconomics.ac.uk/
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  1. Philippe Jehiel, 2005. "Analogy-Based Expectation Equilibrium," Levine's Bibliography 784828000000000106, UCLA Department of Economics.
  2. Philippe Jehiel & Dov Samet, 2001. "Learning To Play Games In Extensive Form By Valuation," Levine's Working Paper Archive 391749000000000010, David K. Levine.
  3. Madarasz, Kristof, 2008. "Information projection: model and applications," MPRA Paper 38612, University Library of Munich, Germany, revised 2011.
  4. Eliaz, Kfir, 2003. "Nash equilibrium when players account for the complexity of their forecasts," Games and Economic Behavior, Elsevier, Elsevier, vol. 44(2), pages 286-310, August.
  5. Michele Piccione & Ariel Rubinstein, 2002. "Modelling the economic interaction of agents with diverse abilities to recognise equilibrium patterns," LSE Research Online Documents on Economics, London School of Economics and Political Science, LSE Library 2061, London School of Economics and Political Science, LSE Library.
  6. Kristóf Madarász, 2012. "Information Projection: Model and Applications," Review of Economic Studies, Oxford University Press, vol. 79(3), pages 961-985.
  7. Spiegler, Ran, 2011. "Bounded Rationality and Industrial Organization," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780195398717, October.
  8. Rabin, Matthew & Vayanos, Dimitri, 2007. "The Gambler's and Hot-Hand Fallacies: Theory and Applications," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6081, C.E.P.R. Discussion Papers.
  9. Ran Spiegler, 2003. "Simplicity of Beliefs and Delay Tactics in a Concession Game," Levine's Working Paper Archive 506439000000000208, David K. Levine.
  10. Erik Eyster & Michele Piccione, 2013. "An Approach to Asset Pricing Under Incomplete and Diverse Perceptions," Econometrica, Econometric Society, Econometric Society, vol. 81(4), pages 1483-1506, 07.
  11. Koller, Daphne & Milch, Brian, 2003. "Multi-agent influence diagrams for representing and solving games," Games and Economic Behavior, Elsevier, Elsevier, vol. 45(1), pages 181-221, October.
  12. Ariel Rubinstein, 1997. "Finite automata play the repeated prisioners dilemma," Levine's Working Paper Archive 1639, David K. Levine.
  13. James J. Heckman & Rodrigo Pinto, 2013. "Causal Analysis after Haavelmo," NBER Working Papers 19453, National Bureau of Economic Research, Inc.
  14. Rubinstein, Ariel, 1993. "On Price Recognition and Computational Complexity in a Monopolistic Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 473-84, June.
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