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Updating Ambiguity Averse Preferences

Author

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  • Eran Hanany
  • Peter Klibanoff

Abstract

Dynamic consistency leads to Bayesian updating under expected utility. We ask what it implies for the updating of more general preferences. In this paper, we charac- terize dynamically consistent update rules for preference models satisfying ambiguity aversion. This characterization extends to regret-based models as well. As an appli- cation of our general result, we characterize dynamically consistent updating for two important models of ambiguity averse preferences: the ambiguity averse smooth am- biguity preferences (Klibanoff, Marinacci and Mukerji [Econometrica 73 2005, pp. 1849-1892]) and the variational preferences (Maccheroni, Marinacci and Rustichini [Econometrica 74 2006, pp. 1447-1498]). The latter includes max-min expected utility (Gilboa and Schmeidler [Journal of Mathematical Economics 18 1989, pp. 141-153]) and the multiplier preferences of Hansen and Sargent [American Economic Review 91(2) 2001, pp. 60-66] as special cases. For smooth ambiguity preferences, we also identify a simple rule that is shown to be the unique dynamically consistent rule among a large class of rules that may be expressed as reweightings of Bayes's rule.

Suggested Citation

  • Eran Hanany & Peter Klibanoff, 2008. "Updating Ambiguity Averse Preferences," Discussion Papers 1468, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1468
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    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1468.pdf
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    References listed on IDEAS

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    1. Simon Grant & Atsushi Kajii & Ben Polak, 2000. "Preference for Information and Dynamic Consistency," Theory and Decision, Springer, vol. 48(3), pages 263-286, May.
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    Cited by:

    1. Takashi Hayashi, 2011. "Context dependence and consistency in dynamic choice under uncertainty: the case of anticipated regret," Theory and Decision, Springer, vol. 70(4), pages 399-430, April.

    More about this item

    Keywords

    Updating; Dynamic Consistency; Ambiguity; Regret; Ellsberg; Bayesian; Consequentialism; Smooth Ambiguity;

    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
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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