Probability and confidence — Keynes vs. Bayes22 December, 2016 at 15:29 | Posted in Economics | 13 Comments
An alternative possibility is to accept the consequences of the apparent fact that the central prediction of the Bayesian model in its descriptive capacity, that people’s choices are or are ‘as if’ they are informed by real-valued subjective probabilities, is, in general, false …
According to Keynes’s decision theory it is rational to prefer to be guided by probabilities determined on the basis of greater evidential ‘weight’, the amount or completeness, in some sense, of the relevant evidence on which a judgement of probability is based … Keynes later suggests a link between weight and confidence, distinguishing between the ‘best estimates we can make of probabilities and the confidence with which we make them’ … The distinction between judgement of probability and the confidence with which it is made has no place in the world of a committed Bayesian because it drives a wedge into the link between choices and degrees of belief on which it is founded.
According to Keynes we live in a world permeated by unmeasurable uncertainty – not quantifiable stochastic risk – which often forces us to make decisions based on anything but ‘rational expectations.’ Keynes rather thinks that we base our expectations on the confidence or ‘weight’ we put on different events and alternatives. To Keynes expectations are a question of weighing probabilities by ‘degrees of belief,’ beliefs that often have preciously little to do with the kind of stochastic probabilistic calculations made by rational agents as modeled by mainstream economics.