Updating Ambiguity Averse Preferences

Eran Hanany and Peter Klibanoff

No 1468, Discussion Papers from Northwestern University, Center for Mathematical Studies in Economics and Management Science

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.

Keywords: Updating; Dynamic Consistency; Ambiguity; Regret; Ellsberg; Bayesian; Consequentialism; Smooth Ambiguity (search for similar items in EconPapers)
JEL-codes: D81 D83 D91 (search for similar items in EconPapers)
Date: 2008-07
New Economics Papers: this item is included in nep-cba and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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