Empirical studies show that agents often violate Bayes' rule in updating probability expectations. This paper deals with errors in combining observations with prior knowledge. Such errors neccessarily occur when agents have limited information-processing capacities. It is shown that rational control of errors could lead to systematic deviations from Bayesian inference which are consistent with empirical behaviour. It is also shown that simple adaptive updating rules are more robust against errors and have a better MSE-performance than the Bayesian rule.
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Paper provided by Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät in its series Working Paper Series B with number
1997-01.
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Find related papers by JEL classification: D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
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