Prior Beliefs and Ambiguity Attitudes in Decision from Experience

Abstract

Prior beliefs and their updating play a crucial role in decisions under uncertainty, and theories about them have been well established in classical Bayesianism. Yet, they are almost absent for ambiguous decisions from experience. This paper proposes a new decision model that incorporates the role of prior beliefs, beyond the role of ambiguity attitudes, into the analysis of such decisions. Hence, it connects ambiguity theories, popular in economics, with decision from experience, popular (mostly) in psychology, to the benefit of both. A reanalysis of some existing data sets from the literature on decisions from experience shows that the model that incorporates prior beliefs into the estimation of subjective probabilities outperforms the commonly used model that approximates subjective probabilities with observed relative frequencies. Controlling for subjective priors, we obtain more accurate measurements of ambiguity attitudes, and thus a new explanation of the gap between decision from description and decision from experience. This paper was accepted by Manel Baucells, decision analysis.