DYNAMICALLY CONSISTENT BELIEFS MUST BE BAYESIAN

Experimental evidence such as the Ellsberg Paradox contradicts the Savage model of decision making under uncertainty, since the representation of beliefs underlying preferces by a single probability measure leaves no room for the degree of imprecision in information to affect decisions. Proceeding axiomatically, this paper shows that the existence of a Bayesain prior is implied, even if Savage’s Sure-Thing Principle is deleted, if preferences (i) are “based on beliefs” and (ii) admit dynamically consistent updating in response to new information. The result raises questions about the appeal of models of preference that feature a separation of tastes and beliefs. Journal of Economic Literature Classification Number: D81. © 1993 by Academic Press, Inc.