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, IUF - Institut universitaire de France - M.E.N.E.S.R. - Ministère de l'Education nationale, de l’Enseignement supérieur et de la Recherche

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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, unawareness, multiple priors. JEL Classification: D81 * We thank Adam Dominiak, Peter Klibanoff, Sujoy Mukerji, Klaus Nehring, and participants at RUD2019 and at the economics seminar at UGA. We are also especially grateful to the guest editor and two anonymous referees for their patience and perseverance in reviewing earlier versions and providing us with many useful comments and suggestions that have considerably improved the clarity of our exposition.

Keywords: latent variables; Ambiguity; Updating; Multiple priors; Unawareness; RCT; Missing variables (search for similar items in EconPapers)
Date: 2020-04-17
New Economics Papers: this item is included in nep-mic
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Journal Article: Ambiguity and Awareness: A Coherent Multiple Priors Model (2021)
Working Paper: Ambiguity and Awareness: A Coherent Multiple Priors Model (2021)
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