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Subjective Contingencies and Limited Bayesian Updating

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  • Minardi, Stefania
  • Savochkin, Andrei

Abstract

We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.

Suggested Citation

  • Minardi, Stefania & Savochkin, Andrei, 2017. "Subjective Contingencies and Limited Bayesian Updating," HEC Research Papers Series 1203, HEC Paris.
    • Handle: RePEc:ebg:heccah:1203
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    Cited by:

    1. Ani Guerdjikova & John Quiggin, 2019. "Market Selection With Differential Financial Constraints," Econometrica, Econometric Society, vol. 87(5), pages 1693-1762, September.
    2. Piermont, Evan, 2017. "Introspective unawareness and observable choice," Games and Economic Behavior, Elsevier, vol. 106(C), pages 134-152.
    3. Chollete, Lorán & Jaffee, Dwight & Mamun, Khawaja A., 2022. "Policy suggestions from a simple framework with extreme outcomes," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 374-398.
    4. Evan Piermont & Peio Zuazo-Garin, 2020. "Failures of Contingent Thinking," Papers 2007.07703, arXiv.org, revised Jul 2023.
    5. Guerdjikova, A. & Quiggin, J., 2020. "Financial market equilibrium with bounded awareness," Working Papers 2020-10, Grenoble Applied Economics Laboratory (GAEL).
    6. Saponara, Nick, 2022. "Revealed reasoning," Journal of Economic Theory, Elsevier, vol. 199(C).
    7. Lorán Chollete & Sharon G. Harrison, 2021. "Unintended Consequences: Ambiguity Neglect and Policy Ineffectiveness," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 47(2), pages 206-226, April.

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    More about this item

    Keywords

    understanding of uncertainty; subjective state space; non-Bayesian updating;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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