Subjective Contingencies and Limited Bayesian Updating

52 Pages Posted: 3 May 2017

See all articles by Stefania Minardi

Stefania Minardi

HEC Paris - Economics & Decision Sciences

Andrei Savochkin

New Economic School (NES)

Date Written: May 1, 2017

Abstract

We depart from Savage’s (1954) common state space assumption and introduce a model that allows for a subjective understanding of uncertainty. Within the revealed preference paradigm, we uniquely identify the agent’s subjective state space via her preferences conditional on incoming information. According to our representation, the agent’s subjective contingencies are coarser than the analyst’s states; she uses an additively separable utility with respect to her set of contingencies; and she adopts an updating rule that follows the Bayesian spirit but is limited by her perception of uncertainty. We illustrate our theory with an application to the Confirmatory Bias.

Keywords: understanding of uncertainty, subjective state space, non-Bayesian updating

JEL Classification: D81

Suggested Citation

Minardi, Stefania and Savochkin, Andrei, Subjective Contingencies and Limited Bayesian Updating (May 1, 2017). HEC Paris Research Paper No. ECO-SCD-2017-1203. Available at SSRN: https://ssrn.com/abstract=2962260 or http://dx.doi.org/10.2139/ssrn.2962260

Stefania Minardi (Contact Author)

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Andrei Savochkin

New Economic School (NES) ( email )

100A Novaya Street
Moscow, Skolkovo 143026
Russia

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