Review of Behavioral Economics > Vol 6 > Issue 1

Information-Theoretic Foundation for the Weighted Updating Model

Jesse Aaron Zinn, Clayton State University, USA, JesseZinn@Clayton.edu
 
Suggested Citation
Jesse Aaron Zinn (2019), "Information-Theoretic Foundation for the Weighted Updating Model", Review of Behavioral Economics: Vol. 6: No. 1, pp 39-51. http://dx.doi.org/10.1561/105.00000086

Published: 26 Feb 2019
© 2019 J. A. Zinn
 
Subjects
Behavioral Economics
 
Keywords
JEL Codes: C02D03D83
Bayesian UpdatingCognitive BiasesIrrational ExpectationsLearningUncertainty
 

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In this article:
1. Introduction
2. The Weighted Updating Model
3. Monotone Concentration and Dispersion
4. Information Entropy as a Measure of Dispersion
5. Concluding Remarks
References

Abstract

Weighted updating generalizes Bayesian updating, allowing for biased beliefs by weighting the likelihood function and prior distribution with positive real exponents. I provide a rigorous foundation for the model by showing that transforming a distribution by exponential weighting (and normalizing) systematically affects the information entropy of the resulting distribution. For weights greater than one the resulting distribution has less information entropy than the original distribution, and vice versa. As the entropy of a distribution measures how informative a decision maker is treating the underlying observation(s), this result suggests a useful interpretation of the weights. For example, a weight greater than one on a likelihood function models an individual who is treating the associated observation(s) as being more informative than a perfect Bayesian would.

DOI:10.1561/105.00000086