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An Axiomatic Model of Non-Bayesian Updating

  • Larry G. Epstein

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 behaviour when formulating plans. Gul and Pesendorfer's theory of temptation and self-control is a key building block. The main result is a representation theorem that generalizes (the dynamic version of) Anscombe-Aumann's theorem so that both the prior and the way in which it is updated are subjective. The model can accommodate updating biases analogous to those observed by psychologists. Copyright 2006, Wiley-Blackwell.

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File URL: http://hdl.handle.net/10.1111/j.1467-937X.2006.00381.x
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Article provided by Oxford University Press in its journal The Review of Economic Studies.

Volume (Year): 73 (2006)
Issue (Month): 2 ()
Pages: 413-436

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Handle: RePEc:oup:restud:v:73:y:2006:i:2:p:413-436
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  1. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  2. Laibson, David I., 1997. "Golden Eggs and Hyperbolic Discounting," Scholarly Articles 4481499, Harvard University Department of Economics.
  3. Ozdenoren, Emre, 2002. "Completing the State Space with Subjective States," Journal of Economic Theory, Elsevier, vol. 105(2), pages 531-539, August.
  4. Paolo Ghirardato, 2002. "Revisiting Savage in a conditional world," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 20(1), pages 83-92.
  5. Matthew Rabin & Joel L. Schrag, 1999. "First Impressions Matter: A Model of Confirmatory Bias," The Quarterly Journal of Economics, Oxford University Press, vol. 114(1), pages 37-82.
  6. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, 01.
  7. Alon Brav & J.B. Heaton, 2002. "Competing Theories of Financial Anomalies," Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 575-606, March.
  8. Eddie Dekel & Barton Lipman & Aldo Rustichini, 2006. "Temptation–Driven Preferences," Discussion Papers 1423, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  9. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  10. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
  11. Klaus Nehring, 1999. "Preference for Flexibility in a Savage Framework," Econometrica, Econometric Society, vol. 67(1), pages 101-120, January.
  12. Kopylov Igor, 2009. "Temptations in General Settings," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, September.
  13. Epstein, Larry G. & Schneider, Martin, 2003. "Recursive multiple-priors," Journal of Economic Theory, Elsevier, vol. 113(1), pages 1-31, November.
  14. Geanakoplos, John, 1994. "Common knowledge," Handbook of Game Theory with Economic Applications, in: R.J. Aumann & S. Hart (ed.), Handbook of Game Theory with Economic Applications, edition 1, volume 2, chapter 40, pages 1437-1496 Elsevier.
  15. Matthew Rabin., 1997. "Psychology and Economics," Economics Working Papers 97-251, University of California at Berkeley.
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