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Non-Bayesian Updating : A Theoretical Framework

Author

Listed:
  • Larry G. Epstein

    () (University of Rochester)

  • Alvaro Sandroni

    () (J.L.Kellogg School of Management, MEDS, Northwestern University)

Abstract

This paper models an agent in an infinite horizon setting who does not update according to Bayes' Rule, and who is self-aware and anticipates her updating behavior when formulating plans. Choice-theoretic axiomatic foundations are provided. Then the model is specialized axiomatically to capture updating biases that reflect excessive weight given to (i) prior beliefs, or alternatively, (ii) the realized sample. Finally, the paper describes a counterpart of the exchangeable Bayesian model, where the agent tries to learn about parameters, and some answers are provided to the question "what does a non-Bayesian updater learn?"

Suggested Citation

  • Larry G. Epstein & Alvaro Sandroni, 2003. "Non-Bayesian Updating : A Theoretical Framework," RCER Working Papers 505, University of Rochester - Center for Economic Research (RCER).
  • Handle: RePEc:roc:rocher:505
    as

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    File URL: http://rcer.econ.rochester.edu/RCERPAPERS/rcer_505.pdf
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    References listed on IDEAS

    as
    1. Larry G. Epstein, 2006. "An Axiomatic Model of Non-Bayesian Updating," Review of Economic Studies, Oxford University Press, vol. 73(2), pages 413-436.
    2. R. H. Strotz, 1955. "Myopia and Inconsistency in Dynamic Utility Maximization," Review of Economic Studies, Oxford University Press, vol. 23(3), pages 165-180.
    3. Adam Brandenburger & Eddie Dekel, 2014. "Hierarchies of Beliefs and Common Knowledge," World Scientific Book Chapters,in: The Language of Game Theory Putting Epistemics into the Mathematics of Games, chapter 2, pages 31-41 World Scientific Publishing Co. Pte. Ltd..
    4. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
    5. Jawwad Noor, 2005. "Temptation, Welfare and Revealed Preference," Boston University - Department of Economics - Working Papers Series WP2005-15, Boston University - Department of Economics.
    6. Epstein, Larry G & Wang, Tan, 1996. ""Beliefs about Beliefs" without Probabilities," Econometrica, Econometric Society, vol. 64(6), pages 1343-1373, November.
    7. Matthew Rabin, 2002. "Inference by Believers in the Law of Small Numbers," The Quarterly Journal of Economics, Oxford University Press, vol. 117(3), pages 775-816.
    8. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
    9. Dekel, Eddie & Lipman, Barton L & Rustichini, Aldo, 2001. "Representing Preferences with a Unique Subjective State Space," Econometrica, Econometric Society, vol. 69(4), pages 891-934, July.
    10. Kopylov Igor, 2009. "Temptations in General Settings," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, September.
    11. Faruk Gul & Wolfgang Pesendorfer, 2004. "Self-Control and the Theory of Consumption," Econometrica, Econometric Society, vol. 72(1), pages 119-158, January.
    12. N/A, 1996. "Note:," Foreign Trade Review, , vol. 31(1-2), pages 1-1, January.
    13. Leonid Kogan & Stephen A. Ross & Jiang Wang & Mark M. Westerfield, 2006. "The Price Impact and Survival of Irrational Traders," Journal of Finance, American Finance Association, vol. 61(1), pages 195-229, February.
    14. Epstein, Larry G., 1983. "Stationary cardinal utility and optimal growth under uncertainty," Journal of Economic Theory, Elsevier, vol. 31(1), pages 133-152, October.
    15. Epstein, Larry G. & Peters, Michael, 1999. "A Revelation Principle for Competing Mechanisms," Journal of Economic Theory, Elsevier, vol. 88(1), pages 119-160, September.
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    Citations

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    Cited by:

    1. Kwon, Seokbeom & Motohashi, Kazuyuki, 2017. "How institutional arrangements in the National Innovation System affect industrial competitiveness: A study of Japan and the U.S. with multiagent simulation," Technological Forecasting and Social Change, Elsevier, vol. 115(C), pages 221-235.
    2. André Lapied & Thomas Rongiconi, 2013. "Ambiguity as a Source of Temptation: Modeling Unstable Beliefs," Working Papers halshs-00797631, HAL.
    3. repec:hal:journl:dumas-00809694 is not listed on IDEAS
    4. Ariane Lambert-Mogiliansky & François Dubois, 2015. "Transparency in Public Life. A Quantum Cognition Perspective," PSE Working Papers halshs-01064980, HAL.
    5. Markus M. Mobius & Muriel Niederle & Paul Niehaus & Tanya S. Rosenblat, 2011. "Managing Self-Confidence: Theory and Experimental Evidence," NBER Working Papers 17014, National Bureau of Economic Research, Inc.
    6. repec:spr:joecth:v:66:y:2018:i:1:d:10.1007_s00199-017-1061-0 is not listed on IDEAS
    7. Ertac, Seda, 2011. "Does self-relevance affect information processing? Experimental evidence on the response to performance and non-performance feedback," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 532-545.
    8. Gershkov, Alex & Moldovanu, Benny, 2013. "Non-Bayesian optimal search and dynamic implementation," Economics Letters, Elsevier, vol. 118(1), pages 121-125.
    9. KWON Seokbeom & MOTOHASHI Kazuyuki, 2015. "How Institutional Arrangements in the National Innovation System Affect Industrial Competitiveness: A study of Japan and the United States with multiagent simulation," Discussion papers 15065, Research Institute of Economy, Trade and Industry (RIETI).
    10. repec:eee:mateco:v:70:y:2017:i:c:p:90-104 is not listed on IDEAS
    11. Jadbabaie, Ali & Molavi, Pooya & Sandroni, Alvaro & Tahbaz-Salehi, Alireza, 2012. "Non-Bayesian social learning," Games and Economic Behavior, Elsevier, vol. 76(1), pages 210-225.
    12. Epstein Larry G & Noor Jawwad & Sandroni Alvaro, 2010. "Non-Bayesian Learning," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 10(1), pages 1-20, January.
    13. Sun, Lan, 2016. "Hypothesis testing equilibrium in signaling games," Center for Mathematical Economics Working Papers 557, Center for Mathematical Economics, Bielefeld University.
    14. Riella, Gil, 2013. "Preference for Flexibility and Dynamic Consistency," Journal of Economic Theory, Elsevier, vol. 148(6), pages 2467-2482.
    15. Barton L. Lipman & Wolfgang Pesendorfer, 2010. "Temptation," Boston University - Department of Economics - Working Papers Series WP2010-021, Boston University - Department of Economics.
    16. Zhang, Hanzhe, 2013. "Evolutionary justifications for non-Bayesian beliefs," Economics Letters, Elsevier, vol. 121(2), pages 198-201.
    17. Ali Jadbabaie & Pooya Molavi & Alvaro Sandroni & Alireza Tahbaz-Salehi, 2009. "Non-Bayesian Social Learning, Third Version," PIER Working Paper Archive 11-025, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 05 Aug 2011.

    More about this item

    Keywords

    non-Bayesian updating; overreaction; underreaction; confirmatory bias; law of small numbers; gambler's fallacy; hot hand fallacy; temptation; self-control; learning; menus;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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