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Ambiguity and Awareness: A Coherent Multiple Priors Model

Simon Grant, Ani Guerdjikova () and John Quiggin
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Ani Guerdjikova: GAEL - Laboratoire d'Economie Appliquée de Grenoble - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - UGA - Université Grenoble Alpes - Grenoble INP - Institut polytechnique de Grenoble - Grenoble Institute of Technology - UGA - Université Grenoble Alpes

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Abstract: Ambiguity in the ordinary language sense means that available information is open to multiple interpretations. We model this by assuming that individuals are unaware of some possibilities relevant to the outcome of their decisions and that multiple probabilities may arise over an individual's subjective state space depending on which of these possibilities are realized. We formalize a notion of coherent multiple priors and derive a representation result that with full awareness corresponds to the usual unique (Bayesian) prior but with less than full awareness generates multiple priors. When information is received with no change in awareness, each element of the set of priors is updated in the standard Bayesian fashion (that is, full Bayesian updating). An increase in awareness, however, leads to an expansion of the individual's subjective state and (in general) a contraction in the set of priors under consideration.

Keywords: Ambiguity; Multiple priors; Unawareness (search for similar items in EconPapers)
Date: 2021-06-29
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Published in B.E. Journal in Theoretical Economics, Topics in Theoretical Economics, 2021, 21 (2), pp.571-612. ⟨10.1515/bejte-2018-0185⟩

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Journal Article: Ambiguity and Awareness: A Coherent Multiple Priors Model (2021) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03726359

DOI: 10.1515/bejte-2018-0185

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