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Presented By: Department of Economics

A hybrid updating rule of ambiguity preferences

Jian Li, Iowa State University

Jian Li Jian Li
Jian Li
The prior-by-prior updating is an example of a simple generalization of the Bayesian updating rule to the maxmin expected-utility preferences. It can be characterized by a consistency condition on the conditional certainty equivalents. This paper provides a complete characterization of updating in a general class of ambiguity preferences that obeys this consistency. By extending it to two broader classes of ambiguity preferences, variational preferences and confidence preferences, I obtain two new updating rules that naturally nests the prior-by-prior updating rule but also includes a weight of the inverse likelihood of the occurred events. For ambiguity averse preferences less extreme than the maxmin expected-utility class, these updating rules are a hybrid of the prior-by- prior updating rule and the maximum likelihood consideration.

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