Economics and Philosophy

Table of Contents - 2009 - Volume 25, Special Issue 03 (Economics and Philosophy on Ambiguity Aversion)  

Essay

IS IT ALWAYS RATIONAL TO SATISFY SAVAGE'S AXIOMS?

Itzhak Gilboaa1, Andrew Postlewaitea2 and David Schmeidlera3

a1 Tel-Aviv University

a2 University of Pennsylvania

a3 Ohio State University

Abstract

This note argues that, under some circumstances, it is more rational not to behave in accordance with a Bayesian prior than to do so. The starting point is that in the absence of information, choosing a prior is arbitrary. If the prior is to have meaningful implications, it is more rational to admit that one does not have sufficient information to generate a prior than to pretend that one does. This suggests a view of rationality that requires a compromise between internal coherence and justification, similarly to compromises that appear in moral dilemmas. Finally, it is argued that Savage's axioms are more compelling when applied to a naturally given state space than to an analytically constructed one; in the latter case, it may be more rational to violate the axioms than to be Bayesian.

Itzhak Gilboa is Professor of Economics at Tel-Aviv University and at HEC, Paris, and Fellow of the Cowles Foundation at Yale University. His main field of research is the theory of decision under uncertainty.

Andrew Postlewaite is the Harry P. Kamen Professor of Economics and Professor of Finance at the University of Pennsylvania. He is a Fellow of the American Academy of Arts and Sciences. His current interests include extending the models of decision making used in economics and other fields.

David Schmeidler is Professor of Economics at the Ohio State University, and a Professor Emeritus at Tel-Aviv University. Over the past decades, his main field of research is the theory of decision under uncertainty.

Footnotes

We wish to thank Eddie Dekel, Dov Samet and Peter Wakker for discussions and comments.