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Bayesian Decision Theory and the Representation of Beliefs

  • Edi Karni

In this paper, I present a Bayesian decision theory and define choice-based subjective probabilities that faithfully represent Bayesian decision makers’ prior and posterior beliefs regarding the likelihood of the possible effects contingent on his actions. I argue that no equivalent results can be obtained in Savage’s (1954) subjective expected utility theory and give an example illustrating the potential harm caused by ascribing to a decision maker subjective probabilities that do not represent his beliefs.

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File URL: http://ratio.huji.ac.il/sites/default/files/publications/dp444.pdf
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Paper provided by The Federmann Center for the Study of Rationality, the Hebrew University, Jerusalem in its series Discussion Paper Series with number dp444.

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Length: 39 pages
Date of creation: Jan 2007
Date of revision:
Handle: RePEc:huj:dispap:dp444
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  1. Karni, E. & Schmeidler, D., 1991. "On the Uniqueness of Subjective Probabilities," Papers 1-92, Tel Aviv - the Sackler Institute of Economic Studies.
  2. Nau, Robert F, 1995. "Coherent Decision Analysis with Inseparable Probabilities and Utilities," Journal of Risk and Uncertainty, Springer, vol. 10(1), pages 71-91, January.
  3. Karni, Edi, 2006. "Subjective expected utility theory without states of the world," Journal of Mathematical Economics, Elsevier, vol. 42(3), pages 325-342, June.
  4. Karni, Edi, 2007. "Foundations of Bayesian theory," Journal of Economic Theory, Elsevier, vol. 132(1), pages 167-188, January.
  5. Karni, Edi, 1993. "A Definition of Subjective Probabilities with State-Dependent Preferences," Econometrica, Econometric Society, vol. 61(1), pages 187-98, January.
  6. Sanford Grossman & Oliver Hart, . "An Analysis of the Principal-Agent Problem," Rodney L. White Center for Financial Research Working Papers 15-80, Wharton School Rodney L. White Center for Financial Research.
  7. Wakker, Peter, 1987. "Subjective probabilities for state dependent continuous utility," Mathematical Social Sciences, Elsevier, vol. 14(3), pages 289-298, December.
  8. Karni, Edi, 2003. " On the Representation of Beliefs by Probabilities," Journal of Risk and Uncertainty, Springer, vol. 26(1), pages 17-38, January.
  9. Karni, Edi, 1996. "Probabilities and Beliefs," Journal of Risk and Uncertainty, Springer, vol. 13(3), pages 249-62, November.
  10. Costis Skiadas, 1997. "Conditioning and Aggregation of Preferences," Econometrica, Econometric Society, vol. 65(2), pages 347-368, March.
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