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Held, Hermann and Kriegler, Elmar and Augustin, Thomas (2006): Bayesian Learning for a Class of Priors with Prescribed Marginals. Collaborative Research Center 386, Discussion Paper 488
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Abstract

We present Bayesian updating of an imprecise probability measure, represented by a class of precise multidimensional probability measures. Choice and analysis of our class are motivated by expert interviews that we conducted with modelers in the context of climatic change. From the interviews we deduce that generically, experts hold a much more informed opinion on the marginals of uncertain parameters rather than on their correlations. Accordingly, we specify the class by prescribing precise measures for the marginals while letting the correlation structure subject to complete ignorance. For sake of transparency, our discussion focuses on the tutorial example of a linear two-dimensional Gaussian model. We operationalize Bayesian learning for that class by various updating rules, starting with (a modified version of) the generalized Bayes' rule and the maximum likelihood update rule (after Gilboa and Schmeidler). Over a large range of potential observations, the generalized Bayes' rule would provide non-informative results. We restrict this counter-intuitive and unnecessary growth of uncertainty by two means, the discussion of which refers to any kind of imprecise model, not only to our class. First, we find our class of priors too inclusive and, hence, require certain additional properties of prior measures in terms of smoothness of probability density functions. Second, we argue that both updating rules are dissatisfying, the generalized Bayes' rule being too conservative, i.e., too inclusive, the maximum likelihood rule being too exclusive. Instead, we introduce two new ways of Bayesian updating of imprecise probabilities: a ``weighted maximum likelihood method'' and a ``semi-classical method.'' The former bases Bayesian updating on the whole set of priors, however, with weighted influence of its members. By referring to the whole set, the weighted maximum likelihood method allows for more robust inferences than the standard maximum likelihood method and, hence, is better to justify than the latter.Furthermore, the semi-classical method is more objective than the weighted maximum likelihood method as it does not require the subjective definition of a weighting function. Both new methods reveal much more informative results than the generalized Bayes' rule, what we demonstrate for the example of a stylized insurance model.