Subjective Contingencies and Limited Bayesian Updating
52 Pages Posted: 3 May 2017
Date Written: May 1, 2017
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: Suggested Citation