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Explaining Violations of Bayesian Inference

Author

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  • Markus Pasche

    () (University of Jena, Faculty of Economics)

Abstract

Empirical studies show that agents often violate Bayes' rule in updating probability expectations. This paper deals with errors in combining observations with prior knowledge. Such errors neccessarily occur when agents have limited information-processing capacities. It is shown that rational control of errors could lead to systematic deviations from Bayesian inference which are consistent with empirical behaviour. It is also shown that simple adaptive updating rules are more robust against errors and have a better MSE-performance than the Bayesian rule.

Suggested Citation

  • Markus Pasche, 1997. "Explaining Violations of Bayesian Inference," Working Paper Series B 1997-01, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät.
  • Handle: RePEc:jen:jenavo:1997-01
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    Cited by:

    1. Markus Pasche, 1998. "An Approach to Robust Decision Making: The Rationality of Heuristic Behavior," Working Paper Series B 1998-10, Friedrich-Schiller-Universität Jena, Wirtschaftswissenschaftliche Fakultïät.

    More about this item

    Keywords

    Bayes' rule; imprecise beliefs; representativeness; conservativism; adaptive behaviour; rationality;

    JEL classification:

    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • 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
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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