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Learning under Ambiguity - A Note on the Belief Dynamics of Epstein and Schneider (2007)

Heyen, Daniel

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Abstract

Epstein and Schneider (2007) develop a framework of learning under ambiguity, generalizing maxmin preferences of Gilboa and Schmeidler (1989) to intertemporal settings. The specific belief dynamics in Epstein and Schneider (2007) rely on the rejection of initial priors that have become implausible over the learning process. I demonstrate that this feature of ex-post rejection of theories gives rise to choices that are in sharp contradiction with ambiguity aversion. Concrete, the intertemporal maxmin decision-maker equipped with such belief dynamics prefers, under prevalent conditions, a bet in an ambiguous urn over the same bet in a risky urn. I offer two modifications of their framework, each of which is capable of avoiding this anomaly.

Item Type: Working paper
Series Name: Discussion Paper Series, University of Heidelberg, Department of Economics
Volume: 0573
Place of Publication: Heidelberg
Date Deposited: 21 Oct 2014 09:44
Date: October 2014
Number of Pages: 21
Faculties / Institutes: The Faculty of Economics and Social Studies > Alfred-Weber-Institut for Economics
Subjects: 330 Economics
Uncontrolled Keywords: learning under ambiguity, multiple prior, maxmin, ambiguity aversion
Schriftenreihe ID: Discussion Paper Series / University of Heidelberg, Department of Economics
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