CFDP 2244R

Objective Rationality Foundations for (dynamic) α-MEU

Author(s): 

Publication Date: July 2020

Revision Date: July 2021

Pages: 31

Abstract: 

We show how incorporating Gilboa, Maccheroni, Marinacci, and Schmeidler’s (2010) notion of objective rationality into the α-MEU model of choice under ambiguity can overcome several challenges faced by the baseline model without objective rationality. The decision-maker (DM) has a subjectively rational preference ≿^, which captures the complete ranking overacts the DM expresses when forced to make a choice; in addition, we endow the DM with a (possibly incomplete) objectively rational preference ≿*, which captures the rankings the DM deems uncontroversial. Under the objectively founded α-MEU model, ≿^ has an α-MEU representation and ≿*has a unanimity representation à la Bewley (2002), where both representations feature the same utility index and set of beliefs. While the axiomatic foundations of the baseline α-MEU model are still not fully understood, we provide a simple characterization of its objectively founded counterpart. Moreover, in contrast with the baseline model, the model parameters are uniquely identified. Finally, we provide axiomatic foundations for prior-by-prior Bayesian updating of the objectively founded α-MEU model, while we show that, for the baseline model, standard updating rules can be ill-defined.

Keywords: Ambiguity, α-MEU, Objective rationality, Updating

See CFDP Version(s): CFDP 2244