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Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals

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  • Leeat Yariv

Abstract

A large body of experimental data demonstrates that people's beliefs influence their well-being beyond the indirect effect through the actions taken. I present a model that incorporates beliefs into an agent's utility function. The paper provides axiomatic foundations for a special class of non-additive utility indices defined over infinite streams of beliefs and actions. I assume that: 1) there exists a (null) belief that does not have any effect on future preferences; 2) the agent has finite memory -- only finite histories have an effect on current preferences; and 3) if the agent knows she will not be getting any additional future information, she prefers today's beliefs to be consistent with her past choices. Preferences satisfying these assumptions admit a generalized discounted utility representation in which all terms depend on both actions and beliefs. Experimental testability of the proposed framework is also discussed.

Suggested Citation

  • Leeat Yariv, 2001. "Believe and Let Believe: Axiomatic Foundations for Belief Dependent Utility Functionals," Cowles Foundation Discussion Papers 1344, Cowles Foundation for Research in Economics, Yale University.
    • Handle: RePEc:cwl:cwldpp:1344
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    Citations

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    Cited by:

    1. Bovi, Maurizio, 2009. "Economic versus psychological forecasting. Evidence from consumer confidence surveys," Journal of Economic Psychology, Elsevier, vol. 30(4), pages 563-574, August.
    2. Heinrich H. Nax, 2016. "When is Market the Benchmark? Reinforcement Evidence from Repurchase Decisions," Economics Series Working Papers 781, University of Oxford, Department of Economics.
    3. Bracha, Anat & Brown, Donald J., 2012. "Affective decision making: A theory of optimism bias," Games and Economic Behavior, Elsevier, vol. 75(1), pages 67-80.
    4. Leeat Yariv, 2005. "I’ll See It When I Believe It: A Simple Model of Cognitive Consistency," Working Papers 2005-3, Princeton University. Economics Department..
    5. Alem, Yonas & Colmer, Jonathan, 2015. "Consumption smoothing and the welfare cost of uncertainty," LSE Research Online Documents on Economics 63816, London School of Economics and Political Science, LSE Library.
    6. Markus K. Brunnermeier & Jonathan A. Parker, 2005. "Optimal Expectations," American Economic Review, American Economic Association, vol. 95(4), pages 1092-1118, September.
    7. Anat Bracha & Donald J Brown, 2007. "Affective Decision Making: a Behavioral Theory of Choice," Levine's Bibliography 122247000000001676, UCLA Department of Economics.
    8. Yonas Alem & Jonathan Colmer, 2015. "Consumption smoothing and the welfare cost of uncertainty," GRI Working Papers 118b, Grantham Research Institute on Climate Change and the Environment.
    9. Yonas Alem & Jonathan Colmer, 2015. "Consumption Smoothing and the Welfare Cost of Uncertainty," CEP Discussion Papers dp1369, Centre for Economic Performance, LSE.
    10. Anat Bracha & Donald J. Brown, 2008. "Affective Decision Making and the Ellsberg Paradox," Cowles Foundation Discussion Papers 1667, Cowles Foundation for Research in Economics, Yale University.
    11. Anat Bracha, 2004. "Affective Decision Making in Insurance Markets," Yale School of Management Working Papers amz2665, Yale School of Management, revised 01 Sep 2004.
    12. Kovach, Matthew, 2020. "Twisting the truth: foundations of wishful thinking," Theoretical Economics, Econometric Society, vol. 15(3), July.
    13. repec:cep:stieop:59 is not listed on IDEAS
    14. Yonas Alem & Jonathan Colmer, 2015. "Consumption Smoothing and the Welfare Cost of Uncertainty," STICERD - Economic Organisation and Public Policy Discussion Papers Series 059, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
    15. Anat Bracha, 2004. "Affective Decision Making in Insurance Markets," Yale School of Management Working Papers amz2665, Yale School of Management, revised 01 Sep 2004.
    16. Yulian Fan, 2023. "Optimal insurance design under belief-dependent utility and ambiguity," Mathematics and Financial Economics, Springer, volume 17, number 6, December.

    More about this item

    Keywords

    Axiomatic foundations; beliefs; time preference; utility;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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