Precedents, Reputation, and Higher-Order Induction

31 Pages Posted: 28 Jul 2017 Last revised: 30 Aug 2017

See all articles by Rossella Argenziano

Rossella Argenziano

University of Essex - Department of Economics

Itzhak Gilboa

Tel Aviv University - Eitan Berglas School of Economics; HEC Paris - Economics & Decision Sciences

Date Written: July 1, 2017

Abstract

We argue that a precedent is important not only because it changes the relative frequency of a certain event, making it positive rather than zero, but also because it changes the way that relative frequencies are weighed. Specifically, agents assess probabilities of future events based on past occurrences, where not all of these occurrences are deemed equally relevant. More similar cases are weighed more heavily than less similar ones. Importantly, the similarity function is also learnt from experience by "second-order induction". The model can explain why a single precedent affects beliefs above and beyond its effect on relative frequencies, as well as why it is easier to establish reputation at the outset than to re-establish it after having lost it. Finally, we discuss more sophisticated forms of learning, by which similarity is defined not only on cases but also on attributes, and the importance of some attributes, learnt from the data by second-order induction, can also affect the perceived importance of other attributes.

Suggested Citation

Argenziano, Rossella and Gilboa, Itzhak, Precedents, Reputation, and Higher-Order Induction (July 1, 2017). HEC Paris Research Paper No. ECO/SCD-2017-1219. Available at SSRN: https://ssrn.com/abstract=3009163 or http://dx.doi.org/10.2139/ssrn.3009163

Rossella Argenziano

University of Essex - Department of Economics ( email )

Wivenhoe Park
Colchester CO4 3SQ
United Kingdom

Itzhak Gilboa (Contact Author)

Tel Aviv University - Eitan Berglas School of Economics ( email )

P.O. Box 39040
Ramat Aviv, Tel Aviv, 69978
Israel
972-3-640-6423 (Phone)
972-3-640-9908 (Fax)

HEC Paris - Economics & Decision Sciences

Paris
France

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