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Sequential ε-Contamination with Learning

Author

Listed:
  • Hiroyuki Kato

    (Department of Management and Economics, Kaetsu University)

  • Kiyohiko G. Nishimura

    (National Graduate Institute for Policy Studies (GRIPS) and CARF, University of Tokyo)

  • Hiroyuki Ozaki

    (Faculty of Economics, Keio University)

Abstract

The ε-contamination has been studied extensively as a convenient and operational specification of Knightian uncertainty. However, it is formulated in a static, one-shot economic environment. This paper extends this concept into a dynamic and sequential framework, allowing learning and guaranteeing time consistency of intertemporal decision. We develop the theory of the rectangular ε-contamination, which can be represented by a sequence of ε's that "contaminates" the conditional principal probability measure. We then compare this sequential (thus closed-loop) rectangular ε-contamination with the initial-period one-shot (thus open-loop) ε-contamination, which is a straightforward extension of the static ε-contamination.

Suggested Citation

  • Hiroyuki Kato & Kiyohiko G. Nishimura & Hiroyuki Ozaki, 2019. "Sequential ε-Contamination with Learning," CARF F-Series CARF-F-468, Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo.
    • Handle: RePEc:cfi:fseres:cf468
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    References listed on IDEAS

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    1. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    2. Kiyohiko G. Nishimura & Hiroyuki Ozaki, 2017. "Economics of Pessimism and Optimism," Springer Books, Springer, number 978-4-431-55903-0, December.
    3. Cyrus Chu & Wen-Fang Liu, 2002. "Knightian Uncertainty and the Voting Paradox," Working Papers UWEC-2002-10, University of Washington, Department of Economics.
    4. ,, 2009. "Choice deferral and ambiguity aversion," Theoretical Economics, Econometric Society, vol. 4(2), June.
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