Rational beliefs when the truth is not an option

32 Pages Posted: 11 Jan 2022 Last revised: 25 Oct 2024

See all articles by Filippo Massari

Filippo Massari

University of Bologna, Department of Economics

Jonathan Newton

Kyoto University - Institute of Economic Research

Date Written: January 9, 2022

Abstract

In misspecified environments, should an economic agent act rationally towards optimizing some goal? If so, what should that goal be? Recent work has focused on the goal of bidirectional consistency of beliefs and actions, in effect finding a Nash equilibrium of an imaginary game in which one player chooses actions and another player chooses beliefs. In general, such outcomes maximize neither log-likelihood nor objective payoffs over the combined space of beliefs and actions. We suggest a goal and associated learning algorithm to maximize these latter quantities. When parameters are suitably chosen, this goal function selects models favored by evolutionary forces.

Keywords: misspecified learning, evolutionary models.

JEL Classification: C7, D8

Suggested Citation

Massari, Filippo and Newton, Jonathan, Rational beliefs when the truth is not an option (January 9, 2022). Available at SSRN: https://ssrn.com/abstract=4005854 or http://dx.doi.org/10.2139/ssrn.4005854

Filippo Massari

University of Bologna, Department of Economics ( email )

Bologna
Italy

Jonathan Newton (Contact Author)

Kyoto University - Institute of Economic Research ( email )

Yoshida-Honmachi
Sakyo-ku
Kyoto 606-8501
JAPAN

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