A Behavioral Characterization of Plausible Priors

Abstract

Recent theories of choice under uncertainty represent ambiguity via multiple priors, informally interpreted as alternative probabilistic models of the uncertainty that the decision-maker considers equally plausible. This paper provides a robust behavioral foundation for this interpretation. A prior P is deemed “plausible” if (i) preferences over a subset C of acts are consistent with subjective expected utility (SEU), and (ii) jointly with an appropriate utility function, P provides the unique SEU representation of preferences over C. Under appropriate axioms, plausible priors can be elicited from preferences; moreover, if these axioms hold, (i) preferences are probabilistically sophisticated if and only if they are SEU, and (ii) under suitable consequentialism and dynamic consistency axioms, “plausible posteriors” can be derived from plausible priors via Bayes’ rule. Several well-known decision models are consistent with the axioms proposed here.

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