Polarization and Ambiguity
Sandeep Baliga, Eran Hanany, Peter Klibanoff
American Economic Review · 2013 · Volume 103 · Issue 7
Abstract
We offer a theory of polarization as an optimal response to ambiguity. Suppose individual A's beliefs first-order stochastically dominate individual B's. They observe a common signal. They exhibit polarization if A's posterior dominates her prior and B's prior dominates her posterior. Given agreement on conditional signal likelihoods, we show that polarization is impossible under Bayesian updating or after observing extreme signals. However, we also show that polarization can arise after intermediate signals as ambiguity averse individuals implement their optimal prediction strategies. We explore when this polarization will occur and the logic underlying it.
Keywords
Criteria for Decision-Making under Risk and Uncertainty, Asymmetric and Private Information, Mechanism Design, Search, Learning, Information and Knowledge, Communication, Belief
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