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Bayesian Networks and Boundedly Rational Expectations

Spiegler, R; (2016) Bayesian Networks and Boundedly Rational Expectations. The Quarterly Journal of Economics , 131 (3) pp. 1243-1290. 10.1093/qje/qjw011. Green open access

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Abstract

I present a framework for analyzing decision making under imperfect understanding of correlation structures and causal relations. A decision maker (DM) faces an objective long-run probability distribution p over several variables (including the action taken by previous DMs). The DM is characterized by a subjective causal model, represented by a directed acyclic graph over the set of variable labels. The DM attempts to fit this model to p, resulting in a subjective belief that distorts p by factorizing it according to the graph via the standard Bayesian network formula. As a result of this belief distortion, the DM’s evaluation of actions can vary with their long-run frequencies. Accordingly, I define a "personal equilibrium" notion of individual behavior. The framework enables simple graphical representations of causal-attribution errors (such as coarseness or reverse causation), and provides tools for checking rationality properties of the DM's behavior. I demonstrate the framework’s scope of applications with examples covering diverse areas, from demand for education to public policy.

Type: Article
Title: Bayesian Networks and Boundedly Rational Expectations
Open access status: An open access version is available from UCL Discovery
DOI: 10.1093/qje/qjw011
Publisher version: http://dx.doi.org/10.1093/qje/qjw011
Language: English
Additional information: Copyright © The Author(s) 2016. Published by Oxford University Press, on behalf of President and Fellows of Harvard College. All rights reserved. This is a pre-copyedited, author-produced PDF of an article accepted for publication in the Quarterly Journal of Economics following peer review. The version of record [Spiegler, R; (2016) Bayesian Networks and Boundedly Rational Expectations. The Quarterly Journal of Economics, 131 (3) pp. 1243-1290. 10.1093/qje/qjw011] is available online at: http://dx.doi.org/10.1093/qje/qjw011
Keywords: Social Sciences, Economics, Business & Economics, Equilibrium, Games, Model, Information
UCL classification: UCL
UCL > Provost and Vice Provost Offices > UCL SLASH
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS
UCL > Provost and Vice Provost Offices > UCL SLASH > Faculty of S&HS > Dept of Economics
URI: https://discovery.ucl.ac.uk/id/eprint/1503848
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