Fragile beliefs and the price of uncertainty

TLDR: In this article, a representative consumer uses Bayes' law to learn about parameters of several models and to construct probabilities with which to perform ongoing model averaging, and the arrival of signals induces the consumer to alter his posterior distribution over models and parameters.

Abstract: A representative consumer uses Bayes’ law to learn about parameters of several models and to construct probabilities with which to perform ongoing model averaging The arrival of signals induces the consumer to alter his posterior distribution over models and parameters The consumer’s specification doubts induce him to slant probabilities pessimistically The pessimistic probabilities tilt toward a model that puts long-run risks into consumption growth That contributes a countercyclical history-dependent component to prices of risk Keywords Learning, Bayes’ law, robustness, risk sensitivity, pessimism, prices of risk JEL classification C11, C44, C72, E44, G12