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Non-Bayesian Updating : A Theoretical Framework

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  • Larry G. Epstein

    ()
    (University of Rochester)

  • Alvaro Sandroni

    ()
    (J.L.Kellogg School of Management, MEDS, Northwestern University)

Abstract

This paper models an agent in an infinite horizon setting who does not update according to Bayes' Rule, and who is self-aware and anticipates her updating behavior when formulating plans. Choice-theoretic axiomatic foundations are provided. Then the model is specialized axiomatically to capture updating biases that reflect excessive weight given to (i) prior beliefs, or alternatively, (ii) the realized sample. Finally, the paper describes a counterpart of the exchangeable Bayesian model, where the agent tries to learn about parameters, and some answers are provided to the question "what does a non-Bayesian updater learn?"

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File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_505.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 505.

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Length: 60 pages
Date of creation: Dec 2003
Date of revision:
Handle: RePEc:roc:rocher:505

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

Related research

Keywords: non-Bayesian updating; overreaction; underreaction; confirmatory bias; law of small numbers; gambler's fallacy; hot hand fallacy; temptation; self-control; learning; menus;

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References

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  1. Jawwad Noor, 2007. "Temptation, Welfare and Revealed Preference," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2007-008, Boston University - Department of Economics.
  2. Larry G. Epstein, 2006. "An Axiomatic Model of Non-Bayesian Updating," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 413-436.
  3. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, Elsevier, vol. 31(1), pages 133-152, October.
  4. Matthew Rabin, 2001. "Inference by Believers in the Law of Small Numbers," Method and Hist of Econ Thought, EconWPA 0012002, EconWPA.
  5. 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.
  6. 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.
  7. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers, University of California at Berkeley 97-251, University of California at Berkeley.
  8. W. Pesendorfer & F. Gul, 1999. "Temptation and Self-Control," Princeton Economic Theory Papers, Economics Department, Princeton University 99f1, Economics Department, Princeton University.
  9. Leonid Kogan & Stephen Ross & Jiang Wang & Mark Westerfield, 2003. "The Price Impact and Survival of Irrational Traders," NBER Working Papers 9434, National Bureau of Economic Research, Inc.
  10. Epstein, Larry G & Wang, Tan, 1996. ""Beliefs about Beliefs" without Probabilities," Econometrica, Econometric Society, Econometric Society, vol. 64(6), pages 1343-73, November.
  11. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, Elsevier, vol. 88(1), pages 119-160, September.
  12. 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.
  13. Brandenburger Adam & Dekel Eddie, 1993. "Hierarchies of Beliefs and Common Knowledge," Journal of Economic Theory, Elsevier, Elsevier, vol. 59(1), pages 189-198, February.
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Citations

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Cited by:
  1. Markus M. Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing Self-Confidence: Theory and Experimental Evidence," NBER Working Papers 17014, National Bureau of Economic Research, Inc.
  2. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," Working Papers, HAL halshs-00797631, HAL.
  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. Gershkov, Alex & Moldovanu, Benny, 2013. "Non-Bayesian optimal search and dynamic implementation," Economics Letters, Elsevier, Elsevier, vol. 118(1), pages 121-125.
  5. Ali Jadbabaie & Pooya Molavi & Alvaro Sandroni & Alireza Tahbaz-Salehi, 2009. "Non-Bayesian Social Learning, Third Version," PIER Working Paper Archive 11-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Aug 2011.
  6. Matthieu Segol, 2012. "Aggregation of information and beliefs on prediction markets with non-bayesian traders," Post-Print, HAL dumas-00809694, HAL.
  7. Zhang, Hanzhe, 2013. "Evolutionary justifications for non-Bayesian beliefs," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 198-201.
  8. Jadbabaie, Ali & Molavi, Pooya & Sandroni, Alvaro & Tahbaz-Salehi, Alireza, 2012. "Non-Bayesian social learning," Games and Economic Behavior, Elsevier, Elsevier, vol. 76(1), pages 210-225.
  9. Riella, Gil, 2013. "Preference for Flexibility and Dynamic Consistency," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2467-2482.
  10. Ertac, Seda, 2011. "Does self-relevance affect information processing? Experimental evidence on the response to performance and non-performance feedback," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 80(3), pages 532-545.

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