Subjective probability, confidence, and Bayesian updating

Igor Kopylov ()
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Igor Kopylov: University of California, Irvine

Economic Theory, 2016, vol. 62, issue 4, No 1, 635-658

Abstract: Abstract I define subjective probabilities for an ambiguity averse agent who is given an exogenous information set $$\varDelta $$ Δ containing the true probability law on the state space S. The agent in my model evaluates every uncertain prospect via a mixture of the least favorable scenario in $$\varDelta $$ Δ and her unique subjective belief p. This parametric utility structure is characterized by four standard axioms—order, continuity, monotonicity, and Independence—where the last two conditions are modified via the information set $$\varDelta $$ Δ . Any pair of preferences $$\succeq _1$$ ⪰ 1 and $$\succeq _2$$ ⪰ 2 in my model can be compared in terms of confidence—the weights attached to the subjective beliefs $$p_1$$ p 1 and $$p_2$$ p 2 , respectively. The corresponding behavioral condition extends Epstein’s comparative ambiguity aversion that leaves some rankings $$\succeq _1$$ ⪰ 1 and $$\succeq _2$$ ⪰ 2 unrelated. Moreover, I relax the well-known dynamic consistency principle and characterize the Bayesian updating rule for the belief p conditional on any non-null event in S.

Keywords: Ambiguity; Bayesian updating; Dynamic consistency; Confidence; Multiple priors; Epsilon contamination (search for similar items in EconPapers)
JEL-codes: D81 D83 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (9)

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DOI: 10.1007/s00199-015-0929-0

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