Preference for Flexibility and Bayesian Updating

Gil Riella

No 177, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: Dekel, Lipman, and Rustichini (2001) show that preferences over menus of lotteries can be represented by the use of a unique subjective state space and a prior. We provide foundations for Bayesian updating in such a setup. When the subjective state space is finite, we show that Bayesian updating is linked to a comparative theory of preference for flexibility. Without the finiteness of the subjective state space, Bayesian updating is characterized by a more technical condition.

Date: 2008-12
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