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Exploration and correlation

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  • Piermont, Evan
  • Teper, Roee

Abstract

We note that in environments such as exploration problems, in which agents have to choose a single action out of several in each period, an agent's preferences over different strategies can only reveal the margins of her beliefs. However, classical notions of Bayesian updating regard the joint distribution. We develop the relevant environment and tools to solve this issue: We introduce a necessary and sufficient condition on the margins of an agent's beliefs to be consistent with an exchangeable process. Such a consistent process is typically not unique; contemporaneous correlation cannot be identified. We conclude that contemporaneous correlations do not affect the optimal strategy in classical bandit problems.

Suggested Citation

  • Piermont, Evan & Teper, Roee, 2019. "Exploration and correlation," Games and Economic Behavior, Elsevier, vol. 116(C), pages 96-104.
    • Handle: RePEc:eee:gamebe:v:116:y:2019:i:c:p:96-104
    DOI: 10.1016/j.geb.2019.04.005
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    References listed on IDEAS

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    1. Jonathan B. Berk & Richard C. Green, 2004. "Mutual Fund Flows and Performance in Rational Markets," Journal of Political Economy, University of Chicago Press, vol. 112(6), pages 1269-1295, December.
    2. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
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    More about this item

    Keywords

    Bandit problems; Correlated arms; Strong exchangeability;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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