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Rationality of Belief. Or: Why Bayesianism is Neither Necessary nor Sufficient for Rationality

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  • Itzhak Gilboa

    (School of Economics, Tel Aviv University)

  • Andrew Postlewaite

    (Economics, University of Pennsylvania)

  • David Schmeidler

    (School of Mathematical Sciences, Tel Aviv Univ.)

Abstract

Economic theory reduces the concept of rationality to internal consistency. The practice of economics, however, distinguishes between rational and irrational beliefs. There is therefore an interest in a theory of rational beliefs, and of the process by which beliefs are generated and justified. We argue that the Bayesian approach is unsatisfactory for this purpose, for several reasons. First, the Bayesian approach begins with a prior, and models only a very limited form of learning, namely, Bayesian updating. Thus, it is inherently incapable of describing the formation of prior beliefs. Second, there are many situations in which there is not sufficient information for an individual to generate a Bayesian prior. Third, this lack of information is even more acute when we address the beliefs that can be attributed to a society. We hold that one needs to explore other approaches to the representation of information and of beliefs, which may be helpful in describing the formation of Bayesian as well as non-Bayesian beliefs.

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Bibliographic Info

Paper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1484.

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Length: 20 pages
Date of creation: Sep 2004
Date of revision:
Handle: RePEc:cwl:cwldpp:1484

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Keywords: Bayesianism; rationality; savage axioms;

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References

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  1. Epstein Larry G. & Wang Tan, 1995. "Uncertainty, Risk-Neutral Measures and Security Price Booms and Crashes," Journal of Economic Theory, Elsevier, vol. 67(1), pages 40-82, October.
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  6. Hansen, Lars Peter & Sargent, Thomas J., 2003. "Robust control of forward-looking models," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 581-604, April.
  7. Blume, Lawrence & Brandenburger, Adam & Dekel, Eddie, 1991. "Lexicographic Probabilities and Choice under Uncertainty," Econometrica, Econometric Society, vol. 59(1), pages 61-79, January.
  8. Gilboa, I. & Schmeidler, D., 2001. "Inductive Inference: An Axiomatic Approach," Papers 2001-19, Tel Aviv.
  9. Amos Tversky & Daniel Kahneman, 1979. "Prospect Theory: An Analysis of Decision under Risk," Levine's Working Paper Archive 7656, David K. Levine.
  10. David Schmeidler, 1989. "Subjective Probability and Expected Utility without Additivity," Levine's Working Paper Archive 7662, David K. Levine.
  11. Enriqueta Aragones & Itzhak Gilboa & Andrew Postlewaite & David Schmeidler, 2003. "Fact-Free Learning," PIER Working Paper Archive 05-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Dec 2004.
  12. Mark J. Machina & David Schmeidler, 1990. "A More Robust Definition of Subjective Probability," Discussion Paper Serie A 306, University of Bonn, Germany.
  13. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, vol. 20(1), pages 83-92.
  14. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers 485, University of Rochester - Center for Economic Research (RCER).
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  16. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
  17. Nishimura, Kiyohiko G. & Ozaki, Hiroyuki, 2004. "Search and Knightian uncertainty," Journal of Economic Theory, Elsevier, vol. 119(2), pages 299-333, December.
  18. Mailath George J. & Okuno-Fujiwara Masahiro & Postlewaite Andrew, 1993. "Belief-Based Refinements in Signalling Games," Journal of Economic Theory, Elsevier, vol. 60(2), pages 241-276, August.
  19. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
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Cited by:
  1. Itzhak Gilboa & Offer Lieberman & David Schmeidler, 2007. "On the Definition of Objective Probabilities by Empirical Similarity," Levine's Bibliography 843644000000000363, UCLA Department of Economics.
  2. Tigran Melkonyan & Mark Pingle, 2010. "Ambiguity, pessimism, and rational religious choice," Theory and Decision, Springer, vol. 69(3), pages 417-438, September.
  3. Luigi Guiso & Paola Sapienza & Luigi Zingales, 2004. "Cultural Biases in Economic Exchange," NBER Working Papers 11005, National Bureau of Economic Research, Inc.
  4. Itzhak Gilboa & Andrew Postlewaite & David Schmeidler, 2007. "Probabilities in Economic Modeling," Levine's Bibliography 843644000000000357, UCLA Department of Economics.
  5. Itzhak Gilboa & Andrew Postlewaite & David Schmeidler, 2007. "Probability and Uncertainty in Economic Modeling, Second Version," PIER Working Paper Archive 08-002, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 28 Jan 2008.

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