Belief updating under ambiguity: A numerical simulation analysis

Zhenxing Huang, Wengang Li and Jia Yang

Economics Letters, 2023, vol. 233, issue C

Abstract: We compare Bayesian with the two non-Bayesian updating under ambiguity in its model specification and numerical implications. For an ambiguity averse (seeking) decision maker, we find that Gilboa and Schmeidler (GS) updating leads to a lower (higher) certainty equivalent (CE) than Dempster–Shafer (DS) updating and Bayesian updating, and the change of historical information has a bigger (smaller) impact on GS updating than on DS updating. In addition, the results shows that GS updating is more sensitive to the ambiguity attitude than DS updating. The application of numerical analysis in finance especially implies that the sensitivity of price to information depends on the ambiguity attitude of the market.

Keywords: Bayesian updating; Gilboa and Schmeidler (GS) updating; Dempster–Shafer (DS) updating; Information (search for similar items in EconPapers)
JEL-codes: C11 D81 D83 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523003841

DOI: 10.1016/j.econlet.2023.111359

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