Abstract

Maximum-likelihood updating is a well-known approach for extending static ambiguity sensitive preferences to dynamic set-ups. This paper develops an example in which MLU induces an ambiguity averse maxmin expected utility decision-maker to prefer a bet on an ambiguous over a risky urn and be more willing to bet on the ambiguous urn compared to an subjective expected utility decision-maker. This is challenging, since prior to observing draws from the urns, the MEU decision-maker actually preferred the risky over the ambiguous bet and was less willing to bet on the ambiguous urn than the SEU decision-maker. The identified switch in betting preferences is not due to a violation of dynamic consistency or consequentialism. Rather, it results from MLU’s selection of extreme priors, causing a violation of the stability of set inclusion over the course of the updating process.