Coarse Bayesian Updating

Alexander M. Jakobsen, Kellogg School of Management, Northwestern University

Studies have shown that the standard law of belief updating—Bayes’ rule—is descriptively invalid in various settings. In this paper, I introduce and analyze a generalization of Bayes’ rule—Coarse Bayesian updating—accommodating much of the empirical evidence. I characterize the model axiomatically, show how it generates several well-known biases, and derive its main implications in static and dynamic settings. Each axiom expresses a property of Bayes’ rule but, conditional on the others, stops just short of making the agent fully Bayesian. The model employs standard primitives, making it suitable for applications; I demonstrate this by applying it to a standard setting of decision under risk, leading to a close relationship with the Blackwell information ordering and comparative measures of cognitive sophistication and bias.