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Title:Updating ambiguity averse preferences PDF Logo
Authors:Hanany, Eran
Klibanoff, Peter
Issue Date:2008
Series/Report no.:Discussion paper // Center for Mathematical Studies in Economics and Management Science 1468
Abstract:Dynamic consistency leads to Bayesian updating under expected utility. We ask what it implies for the updating of more general preferences. In this paper, we characterize dynamically consistent update rules for preference models satisfying ambiguity aversion. This characterization extends to regret-based models as well. As an application of our general result, we characterize dynamically consistent updating for two important models of ambiguity averse preferences: the ambiguity averse smooth ambiguity preferences (Klibano√ĺ, Marinacci and Mukerji [Econometrica 73 2005, pp. 1849-1892]) and the variational preferences (Maccheroni, Marinacci and Rustichini [Econometrica 74 2006, pp. 1447-1498]). The latter includes max-min expected utility (Gilboa and Schmeidler [Journal of Mathematical Economics 18 1989, pp. 141-153]) and the multiplier preferences of Hansen and Sargent [American Economic Review 91(2) 2001, pp. 60-66] as special cases. For smooth ambiguity preferences, we also identify a simple rule that is shown to be the unique dynamically consistent rule among a large class of rules that may be expressed as reweightings of Bayes.rule.
Subjects:Updating
dynamic consistency
ambiguity
regret
Ellsberg
bayesian
consequentialism
smooth ambiguity
JEL:D81
D83
D91
Document Type:Working Paper
Appears in Collections:Discussion Papers, Kellogg School of Management, Northwestern University

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