Anticipated Utility and Rational Expectations as Approximations of Bayesian Decision Making ∗

  title={Anticipated Utility and Rational Expectations as Approximations of Bayesian Decision Making ∗},
  author={Timothy Cogley and Thomas J. Sargent},
For a Markov decision problem in which unknown transition probabilities serve as hidden state variables, we study the quality of two approximations to the decision rule of a Bayesian who each period updates his subjective distribution over the transition probabilities by Bayes’ law. The first is the usual rational expectations approximation that assumes that the decision maker knows the transition probabilities. The second approximation is a version of Kreps’ (1998) anticipated utility model in… CONTINUE READING
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