Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/97240
Authors: 
Baliga, Sandeep
Hanany, Eran
Klibanoff, Peter
Year of Publication: 
2013
Series/Report no.: 
Discussion Paper, Center for Mathematical Studies in Economics and Management Science 1558
Abstract: 
We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B's prior dominates her posterior. Given agreement on conditional signal likelihoods, we show that polarization is impossible under Bayesian updating or after observing extreme signals. However, we also show that polarization can arise after intermediate signals as ambiguity averse individuals implement their optimal prediction strategies. We explore when this polarization will occur and the logic underlying it.
Subjects: 
Ambiguity aversion
Ellsberg
beliefs
updating
dynamic consistency
Ambiguity aversion
Ellsberg
beliefs
updating
dynamic consistency
Document Type: 
Working Paper

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