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"Reverse Bayesianism": A Choice-Based Theory of Growing Awareness

Author

Listed:
  • Edi Karni

    () (Johns Hopkins University)

  • Marie-Louise Vierø

    () (Queen's University)

Abstract

This paper introduces a new approach to modeling the expanding universe of decision makers in the wake of growing awareness, and invokes the axiomatic approach to model the evolution of decision makers' beliefs as awareness grows. The expanding universe is accompanied by extension of the set of acts, the preference relations over which are linked by a new axiom, invariant risk preferences, asserting that the ranking of lotteries is independent of the set of acts under consideration. The main results are representation theorems and rules for updating beliefs over expanding state spaces and null events that have the flavor of "reverse Bayesianism."

Suggested Citation

  • Edi Karni & Marie-Louise Vierø, 2010. ""Reverse Bayesianism": A Choice-Based Theory of Growing Awareness," Working Papers 1258, Queen's University, Department of Economics.
  • Handle: RePEc:qed:wpaper:1258
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    File URL: http://qed.econ.queensu.ca/working_papers/papers/qed_wp_1258.pdf
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    References listed on IDEAS

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    1. Simon Grant & John Quiggin, 2013. "Inductive reasoning about unawareness," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 54(3), pages 717-755, November.
    2. Salvatore Modica, 2008. "Unawareness, priors and posteriors," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 31(2), pages 81-94, November.
    3. Ehud Lehrer & Roee Teper, 2014. "Extension Rules or What Would the Sage Do?," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 5-22, February.
    4. Burkhard Schipper, 2013. "Awareness-dependent subjective expected utility," International Journal of Game Theory, Springer;Game Theory Society, vol. 42(3), pages 725-753, August.
    5. Li, Jing, 2009. "Information structures with unawareness," Journal of Economic Theory, Elsevier, vol. 144(3), pages 977-993, May.
    6. Halpern, Joseph Y. & Rego, Leandro Chaves, 2008. "Interactive unawareness revisited," Games and Economic Behavior, Elsevier, vol. 62(1), pages 232-262, January.
    7. Gilboa,Itzhak, 2009. "Theory of Decision under Uncertainty," Cambridge Books, Cambridge University Press, number 9780521517324, May.
    8. Heifetz, Aviad & Meier, Martin & Schipper, Burkhard C., 2006. "Interactive unawareness," Journal of Economic Theory, Elsevier, vol. 130(1), pages 78-94, September.
    9. Modica, Salvatore & Rustichini, Aldo, 1999. "Unawareness and Partitional Information Structures," Games and Economic Behavior, Elsevier, vol. 27(2), pages 265-298, May.
    10. Halpern, Joseph Y., 2001. "Alternative Semantics for Unawareness," Games and Economic Behavior, Elsevier, vol. 37(2), pages 321-339, November.
    11. Eddie Dekel & Barton L. Lipman & Aldo Rustichini, 1998. "Standard State-Space Models Preclude Unawareness," Econometrica, Econometric Society, vol. 66(1), pages 159-174, January.
    12. Brian Hill, 2010. "Awareness Dynamics," Post-Print hal-00521801, HAL.
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    Citations

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    Cited by:

    1. repec:kap:theord:v:83:y:2017:i:2:d:10.1007_s11238-017-9594-z is not listed on IDEAS
    2. Heinsalu, Sander, 2014. "Universal type structures with unawareness," Games and Economic Behavior, Elsevier, vol. 83(C), pages 255-266.
    3. Galanis, Spyros, 2016. "The value of information in risk-sharing environments with unawareness," Games and Economic Behavior, Elsevier, vol. 97(C), pages 1-18.
    4. Paul Frijters & Benno Torgler & Brendan Markey-Towler, 2016. "On the Problem of Constructing Rational Preferences," The Economic Record, The Economic Society of Australia, vol. 92, pages 68-82, June.
    5. John Quiggin, 2016. "The value of information and the value of awareness," Theory and Decision, Springer, vol. 80(2), pages 167-185, February.
    6. Edi Karni & Marie-Louise Vierø, 2015. "Probabilistic sophistication and reverse Bayesianism," Journal of Risk and Uncertainty, Springer, vol. 50(3), pages 189-208, June.
    7. Karni, Edi & Vierø, Marie-Louise, 2017. "Awareness of unawareness: A theory of decision making in the face of ignorance," Journal of Economic Theory, Elsevier, vol. 168(C), pages 301-328.
    8. Oliver Walker, 2011. "Unawareness with �possible� possible worlds," GRI Working Papers 69, Grantham Research Institute on Climate Change and the Environment.
    9. Ehud Lehrer & Roee Teper, 2014. "Extension Rules or What Would the Sage Do?," American Economic Journal: Microeconomics, American Economic Association, vol. 6(1), pages 5-22, February.
    10. Piacquadio, Paolo G., 2015. "The Ethics of Intergenerational Risk," Memorandum 15/2015, Oslo University, Department of Economics.
    11. Konrad Grabiszewski, 2015. "Rationalizing epistemic bounded rationality," Theory and Decision, Springer, vol. 78(4), pages 629-637, April.
    12. Auster, Sarah, 2013. "Asymmetric awareness and moral hazard," Games and Economic Behavior, Elsevier, vol. 82(C), pages 503-521.
    13. Oliver Walker & Simon Dietz, 2011. "A representation result for choice under conscious unawareness," GRI Working Papers 59, Grantham Research Institute on Climate Change and the Environment.
    14. repec:kap:theord:v:83:y:2017:i:3:d:10.1007_s11238-016-9580-x is not listed on IDEAS
    15. Grant, Simon & Quiggin, John, 2013. "Bounded awareness, heuristics and the Precautionary Principle," Journal of Economic Behavior & Organization, Elsevier, vol. 93(C), pages 17-31.
    16. Takashi Hayashi, 2012. "Expanding state space and extension of beliefs," Theory and Decision, Springer, vol. 73(4), pages 591-604, October.
    17. Dietrich, Franz, 2016. "Savage's Theorem Under Changing Awareness," MPRA Paper 71306, University Library of Munich, Germany.
    18. Izhakian, Yehuda & Yermack, David, 2017. "Risk, ambiguity, and the exercise of employee stock options," Journal of Financial Economics, Elsevier, vol. 124(1), pages 65-85.
    19. repec:eee:ejores:v:264:y:2018:i:1:p:280-293 is not listed on IDEAS
    20. Yehuda Izhakian & David Yermack & Jaime F. Zender, 2016. "Ambiguity and the Tradeoff Theory of Capital Structure," NBER Working Papers 22870, National Bureau of Economic Research, Inc.
    21. Wenjun Ma & Burkhard C. Schipper, 2017. "Does exposure to unawareness affect risk preferences? A preliminary result," Theory and Decision, Springer, vol. 83(2), pages 245-257, August.
    22. Faro, José Heleno & Lefort, Jean Philippe, 2013. "Dynamic Objective and Subjective Rationality," Insper Working Papers wpe_312, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
    23. repec:eee:mateco:v:71:y:2017:i:c:p:63-73 is not listed on IDEAS

    More about this item

    Keywords

    Awareness; unawareness; reverse Bayesianism; null events;

    JEL classification:

    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • 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

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