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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_521.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 521.

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Length: 36 pages
Date of creation: Sep 2005
Date of revision:
Handle: RePEc:roc:rocher:521

Note: Forthcoming in Review of Economic Studies
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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. 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.
  2. 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.
  3. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, Econometric Society, vol. 72(1), pages 119-158, 01.
  4. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer, Springer, vol. 20(1), pages 83-92.
  5. 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.
  6. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
  7. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 2006. "Temptation–Driven Preferences," Boston University - Department of Economics - Working Papers Series, Boston University - Department of Economics WP2006-024, Boston University - Department of Economics.
  8. Ozdenoren, Emre, 2002. "Completing the State Space with Subjective States," Journal of Economic Theory, Elsevier, Elsevier, vol. 105(2), pages 531-539, August.
  9. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 485, University of Rochester - Center for Economic Research (RCER).
  10. 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.
  11. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, Econometric Society, vol. 69(6), pages 1403-1435, November.
  12. Rabin, Matthew, 1997. "Psychology and Economics," Department of Economics, Working Paper Series, Department of Economics, Institute for Business and Economic Research, UC Berkeley qt8jd5z5j2, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
  13. 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.
  14. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, Econometric Society, vol. 67(1), pages 101-120, January.
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Citations

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Cited by:
  1. Zhang, Hanzhe, 2013. "Evolutionary justifications for non-Bayesian beliefs," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 198-201.
  2. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," AMSE Working Papers 1316, Aix-Marseille School of Economics, Marseille, France.
  3. Sadowski, Philipp, 2013. "Contingent preference for flexibility: eliciting beliefs from behavior," Theoretical Economics, Econometric Society, Econometric Society, vol. 8(2), May.
  4. 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.
  5. Sadowski, Philipp, 2008. "Conditional Preference for Flexibility: Eliciting Beliefs from Behavior," MPRA Paper 8614, University Library of Munich, Germany.
  6. Igor Kopylov & Jawwad Noor, 2009. "Self-Deception and Choice," Levine's Working Paper Archive 814577000000000319, David K. Levine.
  7. Andrés Perea, 2009. "A Model of Minimal Probabilistic Belief Revision," Theory and Decision, Springer, Springer, vol. 67(2), pages 163-222, August.
  8. Eddie Dekel & Barton L. Lipman, 2009. "How (Not) to Do Decision Theory," Levine's Working Paper Archive 814577000000000339, David K. Levine.
  9. 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.
  10. Larry G. Epstein & Alvaro Sandroni, 2003. "Non-Bayesian Updating : A Theoretical Framework," RCER Working Papers, University of Rochester - Center for Economic Research (RCER) 505, University of Rochester - Center for Economic Research (RCER).
  11. Riella, Gil, 2013. "Preference for Flexibility and Dynamic Consistency," Journal of Economic Theory, Elsevier, Elsevier, vol. 148(6), pages 2467-2482.
  12. Kalyan Chatterjee & R. Krishna, 2011. "On preferences with infinitely many subjective states," Economic Theory, Springer, Springer, vol. 46(1), pages 85-98, January.
  13. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 112(2), pages 443-77, May.
  14. 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).
  15. 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.
  16. 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.
  17. Takeoka, Norio, 2007. "Subjective probability over a subjective decision tree," Journal of Economic Theory, Elsevier, Elsevier, vol. 136(1), pages 536-571, September.

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