Rational beliefs when the truth is not an option
32 Pages Posted: 11 Jan 2022 Last revised: 25 Oct 2024
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: Suggested Citation