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Objective rationality foundations for (dynamic) alpha-MEU

Mira Frick (), Ryota Iijima () and Yves Le Yaouanq
Additional contact information
Mira Frick: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/mira-frick
Ryota Iijima: Cowles Foundation, Yale University, https://economics.yale.edu/people/faculty/ryota-iijima
Yves Le Yaouanq: Ludwig-Maximilians-Universit‰t, Munich

No 2244R, Cowles Foundation Discussion Papers from Cowles Foundation for Research in Economics, Yale University

Abstract: We show how incorporating Gilboa, Maccheroni, Marinacci, and Schmeidler's (2010) notion of objective rationality into the alpha-MEU model of choice under ambiguity (Hurwicz, 1951) can overcome several challenges faced by the baseline model without objective rationality. The decision-maker (DM) has a subjectively rational preference $\succsim^\wedge$, which captures the complete ranking over acts the DM expresses when forced to make a choice; in addition, we endow the DM with a (possibly incomplete) objectively rational preference $\succsim^*$, which captures the rankings the DM deems uncontroversial. Under the objectively founded alpha-MEU model, $\succsim^\wedge$ has an alpha-MEU representation and $\succsim^*$ has a unanimity representation à la Bewley (2002), where both representations feature the same utility index and set of beliefs. While the axiomatic foundations of the baseline alpha-MEU model are still not fully understood, we provide a simple characterization of its objectively founded counterpart. Moreover, in contrast with the baseline model, the model parameters are uniquely identified. Finally, we provide axiomatic foundations for prior-by-prior Bayesian updating of the objectively founded alpha-MEU model, while we show that, for the baseline model, standard updating rules can be ill-defined.

Keywords: Ambiguity; Alpha-MEU; Objective rationality; Updating (search for similar items in EconPapers)
Pages: 26 pages
Date: 2020-07, Revised 2021-07
New Economics Papers: this item is included in nep-mic and nep-upt
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Published in Journal of Economic Theory, (March 2022), 200: Article 105394

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