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Belief updating under ambiguity: A numerical simulation analysis

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  • Huang, Zhenxing
  • Li, Wengang
  • Yang, Jia

Abstract

We compare Bayesian with the two non-Bayesian updating under ambiguity in its model specification and numerical implications. For an ambiguity averse (seeking) decision maker, we find that Gilboa and Schmeidler (GS) updating leads to a lower (higher) certainty equivalent (CE) than Dempster–Shafer (DS) updating and Bayesian updating, and the change of historical information has a bigger (smaller) impact on GS updating than on DS updating. In addition, the results shows that GS updating is more sensitive to the ambiguity attitude than DS updating. The application of numerical analysis in finance especially implies that the sensitivity of price to information depends on the ambiguity attitude of the market.

Suggested Citation

  • Huang, Zhenxing & Li, Wengang & Yang, Jia, 2023. "Belief updating under ambiguity: A numerical simulation analysis," Economics Letters, Elsevier, vol. 233(C).
    • Handle: RePEc:eee:ecolet:v:233:y:2023:i:c:s0165176523003841
    DOI: 10.1016/j.econlet.2023.111359
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    References listed on IDEAS

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    1. Lars Peter Hansen & Thomas J Sargent, 2014. "Robust Control and Model Uncertainty," World Scientific Book Chapters, in: UNCERTAINTY WITHIN ECONOMIC MODELS, chapter 5, pages 145-154, World Scientific Publishing Co. Pte. Ltd..
    2. Gilboa, Itzhak, 1985. "Duality in Non-Additive Expected Utility Theory," Foerder Institute for Economic Research Working Papers 275390, Tel-Aviv University > Foerder Institute for Economic Research.
    3. Gilboa Itzhak & Schmeidler David, 1993. "Updating Ambiguous Beliefs," Journal of Economic Theory, Elsevier, vol. 59(1), pages 33-49, February.
    4. Sarin, Rakesh & Wakker, Peter P, 1998. "Revealed Likelihood and Knightian Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 16(3), pages 223-250, July-Aug..
    5. Larry G. Epstein & Martin Schneider, 2007. "Learning Under Ambiguity," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 74(4), pages 1275-1303.
    6. Aurélien Baillon & Zhenxing Huang & Asli Selim & Peter P. Wakker, 2018. "Measuring Ambiguity Attitudes for All (Natural) Events," Econometrica, Econometric Society, vol. 86(5), pages 1839-1858, September.
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    More about this item

    Keywords

    Bayesian updating; Gilboa and Schmeidler (GS) updating; Dempster–Shafer (DS) updating; Information;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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