Ambiguity in the ordinary language sense means that available information is open to multiple interpretations. We model this by assuming that individuals are unaware of some possibilities relevant to the outcome of their decisions and that multiple probabilities may arise over an individual's subjective state space depending on which of these possibilities are realized. We formalize a notion of coherent multiple priors and derive a representation result that with full awareness corresponds to the usual unique (Bayesian) prior but with less than full awareness generates multiple priors. We show that when information is received with no change in awareness, each element of the set of priors is updated in the standard Bayesian fashion (that is, full Bayesian updating). An increase in awareness, however, leads to an expansion of the individual's subjective state and (in general) a contraction in the set of priors under consideration.

Authors: John Quiggin, Simon Grant and Ani Guerdjikova.

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About the presenter’s visit

John Quiggin is a member of staff of the School of Economics at The University of Queensland. He is in room 551A Colin Clark Building (#39) if you would like to call in and have a chat with him.

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