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Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals

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  • Leeat Yariv

Abstract

A large body of experimental data demonstrates that people's beliefs influence their well-being beyond the indirect effect through the actions taken. I present a model that incorporates beliefs into an agent's utility function. The paper provides axiomatic foundations for a special class of non-additive utility indices defined over infinite streams of beliefs and actions. I assume that: 1) there exists a (null) belief that does not have any effect on future preferences; 2) the agent has finite memory -- only finite histories have an effect on current preferences; and 3) if the agent knows she will not be getting any additional future information, she prefers today's beliefs to be consistent with her past choices. Preferences satisfying these assumptions admit a generalized discounted utility representation in which all terms depend on both actions and beliefs. Experimental testability of the proposed framework is also discussed.

Suggested Citation

  • Leeat Yariv, 2001. "Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals," Cowles Foundation Discussion Papers 1344, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:1344
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d13/d1344.pdf
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    Cited by:

    1. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
    2. Peiran Jiao & Heinrich H. Nax, 2016. "When is Market the Benchmark? Reinforcement Evidence from Repurchase Decisions," Economics Series Working Papers 781, University of Oxford, Department of Economics.
    3. Bracha, Anat & Brown, Donald J., 2012. "Affective decision making: A theory of optimism bias," Games and Economic Behavior, Elsevier, vol. 75(1), pages 67-80.
    4. Anat Bracha, 2004. "Affective Decision Making in Insurance Markets," Yale School of Management Working Papers amz2665, Yale School of Management, revised 01 Sep 2004.

    More about this item

    Keywords

    Axiomatic foundations; beliefs; time preference; utility;

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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