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Subjective Contingencies and Limited Bayesian Updating

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  • Stefania Minardi

    (Economics and Decision Sciences Department, HEC Paris)

  • Andrei Savochkin

    (New Economic School (NES))

Abstract

We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.

Suggested Citation

  • Stefania Minardi & Andrei Savochkin, 2016. "Subjective Contingencies and Limited Bayesian Updating," Working Papers w0222, Center for Economic and Financial Research (CEFIR).
    • Handle: RePEc:cfr:cefirw:w0222
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    8. Yuan Gu & Chao Hung Chan, 2024. "Complexity Aversion," Papers 2406.18463, arXiv.org.
    9. Lorán Chollete & Sharon G. Harrison, 2021. "Unintended Consequences: Ambiguity Neglect and Policy Ineffectiveness," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 47(2), pages 206-226, April.

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    JEL classification:

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

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