The (in)appropriate benchmark when beliefs are not the only state variable
AbstractIn models of learning by experimentation, there is a natural benchmark of myopia when the only intertemporal link is the agent`s subjective belief (signal independence). An alternative benchmark using a passive learner has been proposed when there is a further intertemporal link that directly affects payoffs (signal dependence). The purpose of this note is to suggest that the use of this particular benchmark is flawed for two reasons: first, passive learning does not disentangle the effects of knowing that beliefs might change as well as other state variables, and we offer another benchmark using a naive learner that does, and so necessarily reduces to myopia in the signal independent case; secondly, and maybe more tellingly, passive learning does not do what it is supposed to do, namely help measure the gains from active experimentation, since the payoffs of a passive learner can be markedly lower than those of a naive learner.
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Bibliographic InfoPaper provided by University of Oxford, Department of Economics in its series Economics Series Working Papers with number 223.
Date of creation: 01 Feb 2005
Date of revision:
Find related papers by JEL classification:
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-03-18 (All new papers)
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