We provide a critical assessment of the ambiguity aversion literature, which we characterize in terms view that Ellsberg choices are rational responses to ambiguity, be explained by relaxing Savage's Sure-Thing principle and adding an ambiguity-aversion postulate. First, admitting as leads behaviour, such sensitivity irrelevant sunk cost, or information, most economists would consider absurd irrational. Second, argue mathematical objects referred “beliefs” literature have little do with how...

The paper studies the representation and characterization of risks generated by a continuum random variables. Main Theorem is broad class processes in terms decomposition risk into aggregate idiosyncratic components, approximation process finite collections This used to study decision making problems with anonymous state-independent payoffs. An Extension shows that if such payoff function defined on simple processes, then it has unique continuous extension characterized this paper....

We show that a simple "reputation-style" test can always identify which of two experts is informed about the true distribution.The presumes no prior knowledge distribution, achieves any desired degree precision in some fixed finite time, and does not use "counterfactual" predictions.Our relies on reputation argument due to Fudenberg Levine (1992).We then our setup shed light apparent paradox strategically motivated expert ignorantly pass test.We point out this consequence fact that,...

I study individuals who use frequentist models to draw uniform inferences from independent and identically distributed data. The main contribution of this paper is show that distinct may be consistent with empirical evidence, even in the limit when data increases without bound. Decision makers then hold different beliefs interpret their environment differently though they know each other's model base on same evidence. behavior modeled here rational confronting an which learning hard, rather...

Psychological and experimental evidence, as well a wealth of anecdotal examples, suggests that firms may confound fixed, sunk, variable costs, leading to distorted pricing decisions. This article investigates the extent which market forces learning eventually eliminate these distortions. We envision experiment with cost methodologies are consistent real‐world accounting practices, including ones confuse relevance variable, sunk costs Firms follow “naive” adaptive adjust prices reinforcement...

The pioneering contributions of Bewley, Gilboa and Schmeidler highlighted important weaknesses in the foundations economics game theory. Bayesian methodology on which these fields are based does not answer such basic questions as what makes beliefs reasonable, or how agents should form expectations. Providing initial impetus for debating issues is a contribution that will have lasting value it deserves.

We provide a theory of the role discretion in agency. do so by extending standard principal-agent framework to include complex information and trust. With these two new ingredients we find that: optimal agency contracts may be incomplete; they not necessarily use all available, payoff-relevant (the sufficient statistic result fails); inefficiencies persist even though inference about agent's action choice is perfect. show that an response relationships for contracting parties choose...

A common misconception is that precautionary motives in public policy cannot be justified within the Bayesian rational choice framework and decision criteria appeal to ambiguity pessimism are needed. This paper critically evaluates these claims, arguing a process must order avoid paradoxical, even absurd, recommendations, such as policies depend on sunk costs or suppress costless information. The also argues distinction between measurable risk fundamental, Knightian, uncertainty can made...

Leading equilibrium concepts require agents’ beliefs to coincide with the model’s true probabilities and thus be free of systematic errors. This implicitly assumes a criterion that tests against observed outcomes generated by model. We formalize this requirement in stationary environments. show there is tension between requiring can tested errors allowing agents disagree or uncertain about long-run fundamentals. discuss application our analysis asset pricing, Markov perfect equilibria, dynamic games.

This paper provides an explanation for why the sunk cost bias persists among firms competing in a differentiated product oligopoly. Firms experiment with methodologies that are consistent real-world accounting practices, including ones allocate fixed and costs to determine "variable" costs. These follow "naive" adaptive learning adjust prices. Costing increase profits reinforced. We show all eventually display bias. For canonical case of symmetric linear demand, we obtain comparative statics...

We study the merging and testing of opinions in context a prediction model. In absence incentive problems, can be tested rejected, regardless whether or not data produces consensus among Bayesian agents. contrast, presence only rejected when These results show strong connection between opinions. They also relate literature on learning strategic experts.