This seems slightly off both in terms of what (the writer intends us to infer) is going on in Oz's head, and what ought to be going on. First, it seems that Oz may have considered vampires or other supernatural explanations, but dismissed them using the absurdity heuristic, or perhaps what we can call the "Masquerade heuristic" - that's where people who live in a fictional world full of actual vampires and demons and whatnot nevertheless heurise as though they lived in ours. (Aside: Is 'heurise' a reasonable verbing of "use heuristics?") Upon hearing that his friends take the theory seriously (plus perhaps whatever context caused them to make these remarks) he reconsiders without the absurdity penalty. Second, what should be going on is that Oz has theories A, B, C with probabilities adding up to 1-epsilon, where epsilon is the summed probability of "All those explanations which I haven't had time to explicitly consider as theories". Just because he's never explicitly formulated D and formally assigned a probability to it, doesn't mean it doesn't have an implicit one. Once it is picked out of hypothesis space, he can detach it from the other previously unconsidered theories, formally assign an initial probability much smaller than epsilon, and update from there. Of course this is not realistic as a matter of human psychology, but what I'm arguing is that "I never thought of theory X before" does not actually demonstrate that "Oh yeah, theory X makes a lot of sense" is not a Bayesian update. It just means that the updater hasn't had the processing power to fully enumerate the space of available theories.