General Series No. 5 – Rui Tang (HKUST)

A Theory of Contraction Updating

ABSTRACT: We introduce the contraction rule for updating ambiguous beliefs. With the rule, a realized event renders an individual’s belief unambiguous when and only when the event has small ambiguity. The contraction rule is continuous and insensitive to priors that are less likely given the information. The contraction posterior set is independent of the order in which multiple pieces of information arrive. We axiomatize the rule and show that it accommodates recent experimental findings on updating ambiguous information and has robust predictions on individual learning.