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Subjective Contingencies and Limited Bayesian Updating

Author

Listed:
  • Stefania Minardi

    (Economics and Decision Sciences Department, HEC Paris)

  • Andrei Savochkin

    (New Economic School (NES))

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.

Suggested Citation

  • Stefania Minardi & Andrei Savochkin, 2016. "Subjective Contingencies and Limited Bayesian Updating," Working Papers w0222, New Economic School (NES).
    • Handle: RePEc:abo:neswpt:w0222
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    File URL: https://www.nes.ru/files/Preprints-resh/WP222.pdf
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    Cited by:

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    2. Guerdjikova, A. & Quiggin, J., 2020. "Financial market equilibrium with bounded awareness," Working Papers 2020-10, Grenoble Applied Economics Laboratory (GAEL).
    3. Evan Piermont & Peio Zuazo-Garin, 2020. "Failures of Contingent Thinking," Papers 2007.07703, arXiv.org, revised Jul 2023.
    4. Saponara, Nick, 2022. "Revealed reasoning," Journal of Economic Theory, Elsevier, vol. 199(C).
    5. Chollete, Lorán & Jaffee, Dwight & Mamun, Khawaja A., 2022. "Policy suggestions from a simple framework with extreme outcomes," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 374-398.
    6. Eneida Cifligu, 2024. "An Analysis of Albania’s Banking Sector: Current Trends and Future Prospects," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 5, pages 171-185.
    7. Lorán Chollete & Sharon G. Harrison, 2021. "Unintended Consequences: Ambiguity Neglect and Policy Ineffectiveness," Eastern Economic Journal, Palgrave Macmillan;Eastern Economic Association, vol. 47(2), pages 206-226, April.
    8. Yuan Gu & Chao Hung Chan, 2024. "Complexity Aversion," Papers 2406.18463, arXiv.org.
    9. Piermont, Evan, 2017. "Introspective unawareness and observable choice," Games and Economic Behavior, Elsevier, vol. 106(C), pages 134-152.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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