Expanding state space and extension of beliefs

Abstract

This article provides a simple decision theoretic model in which elements of the world successively enter the decision maker’s scope and the state space expands over time, which is intended to be the closest correspondence to the standard subjective expected utility theory. We propose a dynamic consistency condition that after any expansion of the scope, the preference ranking should remain unchanged over acts to which the expansion is irrelevant. Together with other natural axioms, it characterizes a model in which the decision maker’s belief extends over time in order that the marginal distribution of the new belief induced over the old state space coincides with the old belief. It is extended to encompass both expansion of scope and learning events, and we characterize the model with an additional property that the decision maker’s belief updating follows Bayes’ rule when she learns events.