Published October 2012
| Published
Journal Article
Open
Modeling the Change of Paradigm: Non-Bayesian Reactions to Unexpected News
- Creators
- Ortoleva, Pietro
Abstract
Bayes' rule has two well-known limitations: 1) it does not model the reaction to zero-probability events; 2) a sizable empirical evidence documents systematic violations of it. We characterize axiomatically an alternative updating rule, the Hypothesis Testing model. According to it, the agent follows Bayes' rule if she receives information to which she assigned a probability above a threshold. Otherwise, she looks at a prior over priors, updates it using Bayes' rule for second-order priors, and chooses the prior to which the updated prior over priors assigns the highest likelihood. We also present an application to equilibrium refinement in game theory.
Additional Information
© 2012 American Economic Association. I thank two anonymous referees, Kim Border, Mark Dean, Federico Echenique, Larry Epstein, Paolo Ghirardato, Andrea Mattozzi, Asen Kochov, Jawwad Noor, Efe Ok, Leonardo Pejsachowicz, Ariel Rubinstein, Gil Riella, Marciano Siniscalchi, Leeat Yariv, the participants at seminars at ASU, Boston University, Caltech, Collegio Carlo Alberto, New York University, USC, and at ESSET 2010, RUD 2010, SWET 2010, and AEA Meetings 2011 for useful comments and discussions.Attached Files
Published - aer.102.6.2410.pdf
Files
aer.102.6.2410.pdf
Files
(779.7 kB)
Name | Size | Download all |
---|---|---|
md5:51f0bc0bb2848478cee89d5c6f9685ba
|
779.7 kB | Preview Download |
Additional details
- Eprint ID
- 35633
- Resolver ID
- CaltechAUTHORS:20121126-103347996
- Created
-
2012-11-26Created from EPrint's datestamp field
- Updated
-
2021-11-09Created from EPrint's last_modified field