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An Axiomatic Model of Non-Bayesian Updating

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Abstract

This paper models an agent in a three-period setting who does not update according to Bayes'Rule, and who is self-aware and anticipates her updating behavior when formulating plans. The agent is rational in the sense that her dynamic behavior is derived from a single stable preference order on a domain of state-contingent menus of acts. A representation theorem generalizes the (dynamic version of) Anscombe-Aumann's theorem so that both the prior and the way in which it is updated are subjective.

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_498.pdf
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Bibliographic Info

Paper provided by University of Rochester - Center for Economic Research (RCER) in its series RCER Working Papers with number 498.

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Length: 36 pages
Date of creation: Oct 2002
Date of revision: Jan 2005
Handle: RePEc:roc:rocher:498

Note: Revised January 2005
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Postal: University of Rochester, Center for Economic Research, Department of Economics, Harkness 231 Rochester, New York 14627 U.S.A.

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Keywords: Bayes' Rule; non-Bayesian updating; asset price volatility; no-trade theorems; agreeing to bet; common knowledge; temptation; self-control; conservatism; representativeness; overconfidence;

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References

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  1. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers, University of California at Berkeley 97-251, University of California at Berkeley.
  2. Kopylov Igor, 2009. "Temptations in General Settings," The B.E. Journal of Theoretical Economics, De Gruyter, De Gruyter, vol. 9(1), pages 1-25, September.
  3. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers, Economics Department, Princeton University 99f1, Economics Department, Princeton University.
  4. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  5. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 101-120, January.
  6. W. Pesendorfer & F. Gul, 1999. "Self-Control and the Theory of Consumption," Princeton Economic Theory Papers, Economics Department, Princeton University 99f2, Economics Department, Princeton University.
  7. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, Elsevier, vol. 113(1), pages 1-31, November.
  8. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 2009. "Temptation-Driven Preferences," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 937-971.
  9. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, Econometric Society, vol. 69(4), pages 891-934, July.
  10. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, Springer, vol. 20(1), pages 83-92.
  11. Geanakoplos, John, 1994. "Common knowledge," Handbook of Game Theory with Economic Applications, Elsevier, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 40, pages 1437-1496 Elsevier.
  12. Joel L. Schrag, 1999. "First Impressions Matter: A Model Of Confirmatory Bias," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 114(1), pages 37-82, February.
  13. Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 15(2), pages 575-606, March.
  14. Ozdenoren, Emre, 2002. "Completing the State Space with Subjective States," Journal of Economic Theory, Elsevier, Elsevier, vol. 105(2), pages 531-539, August.
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Citations

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Cited by:
  1. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  2. Takeoka, Norio, 2007. "Subjective probability over a subjective decision tree," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 536-571, September.
  3. Barton L. Lipman & Wolfgang Pesendorfer, 2010. "Temptation," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2010-021, Boston University - Department of Economics.
  4. Larry G. Epstein & Jawwad Noor & Alvaro Sandroni, 2005. "Non-Bayesian Updating: A Theoretical Framework," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2005-025, Boston University - Department of Economics.
  5. Aurélien Baillon & Han Bleichrodt & Umut Keskin & Olivier L'Haridon & Author-Name: Chen Li, 2013. "Learning under ambiguity: An experiment using initial public offerings on a stock market," Economics Working Paper Archive (University of Rennes 1 & University of Caen), Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS 201331, Center for Research in Economics and Management (CREM), University of Rennes 1, University of Caen and CNRS.
  6. Jawwad Noor & Igor Kopylov, 2010. "Self-Deception and Choice," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2010-042, Boston University - Department of Economics.
  7. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," Working Papers, HAL halshs-00797631, HAL.
  8. Eddie Dekel & Barton L. Lipman, 2010. "How (Not) to Do Decision Theory," Annual Review of Economics, Annual Reviews, Annual Reviews, vol. 2(1), pages 257-282, 09.
  9. Perea,Andrés, 2005. "A Model of Minimal Probabilistic Belief Revision," Research Memorandum, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR) 034, Maastricht University, Maastricht Research School of Economics of Technology and Organization (METEOR).
  10. Kalyan Chatterjee & R. Krishna, 2011. "On preferences with infinitely many subjective states," Economic Theory, Springer, Springer, vol. 46(1), pages 85-98, January.
  11. Riella, Gil, 2013. "Preference for Flexibility and Dynamic Consistency," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2467-2482.
  12. Andrés Perea, 2009. "A Model of Minimal Probabilistic Belief Revision," Theory and Decision, Springer, Springer, vol. 67(2), pages 163-222, August.
  13. Takashi Hayashi, 2011. "Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret," Theory and Decision, Springer, Springer, vol. 70(4), pages 399-430, April.
  14. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
  15. Takashi Hayashi, 2008. "Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret," KIER Working Papers, Kyoto University, Institute of Economic Research 659, Kyoto University, Institute of Economic Research.
  16. Sadowski, Philipp, 2013. "Contingent preference for flexibility: eliciting beliefs from behavior," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(2), May.
  17. Zhang, Hanzhe, 2013. "Evolutionary justifications for non-Bayesian beliefs," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 198-201.

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