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Dynamic Choice and NonExpected Utility

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Author Info
Sarin, Rakesh
Wakker, Peter P

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Abstract

This paper explores how some widely studied classes of nonexpected utility models could be used in dynamic choice situations. A new 'sequential consistency' condition is introduced for single-stage and multi-stage decision problems. Sequential consistency requires that if a decision maker has committed to a family of models (e.g., the multiple priors family, the rank-dependent family, or the betweenness family) then he use the same family throughout. Conditions are presented under which dynamic consistency, consequentialism, and sequential consistency can be simultaneously preserved for a nonexpected utility maximizer. An important class of applications concerns cases where the exact sequence of decisions and events, and thus the dynamic structure of the decision problem, is relevant to the decision maker. It is shown that for the multiple priors model, dynamic consistency, consequentialism, and sequential consistency can all be preserved. The result removes the argument that nonexpected utility models cannot be consistently used in dynamic choice situations. Rank-dependent and betweenness models can only be used in a restrictive manner, where deviation from expected utility is allowed in at most one stage. Copyright 1998 by Kluwer Academic Publishers

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Publisher Info
Article provided by Springer in its journal Journal of Risk and Uncertainty.

Volume (Year): 17 (1998)
Issue (Month): 2 (November)
Pages: 87-119
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Handle: RePEc:kap:jrisku:v:17:y:1998:i:2:p:87-119

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  1. Simon Grant & Atsushi Kajii & Ben Polak, 1999. "Decomposable Choice Under Uncertainty," Cowles Foundation Discussion Papers 1207, Cowles Foundation, Yale University. [Downloadable!]
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  2. Nathalie Etchart, 2002. "Adequate Moods for non-eu Decision Making in a Sequential Framework," Theory and Decision, Springer, vol. 52(1), pages 1-28, February. [Downloadable!] (restricted)
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  3. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2006. "Recursive Smooth Ambiguity Preferences," Carlo Alberto Notebooks 17, Collegio Carlo Alberto, revised 2008. [Downloadable!]
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  4. André Lapied & Robert Kast, 2009. "Updating Choquet valuation and discounting information arrivals," Working Papers halshs-00410532_v1, HAL. [Downloadable!]
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  5. Ludwig, Alexander & Zimper, Alexander, 2004. "Investment Behavior under Ambiguity: The Case of Pessimistic Decision Makers," Sonderforschungsbereich 504 Publications 04-31, Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim. [Downloadable!]
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  6. Marciano Siniscalchi, 2006. "Dynamic Choice Under Ambiguity," Discussion Papers 1430, Northwestern University, Center for Mathematical Studies in Economics and Management Science. [Downloadable!]
  7. Dominiak, Adam & Lefort, Jean-Philippe, 2009. "Unambiguous Events and Dynamic Choquet Preferences," Working Papers 0489, University of Heidelberg, Department of Economics. [Downloadable!]
  8. Han Bleichrodt & Ulrich Schmidt & Horst Zank, 2008. "Additive utility in prospect theory," The School of Economics Discussion Paper Series 0811, Economics, The University of Manchester. [Downloadable!]
  9. Robert Kast & André Lapied, 2007. "Dynamically Consistent Conditional Choquet Capacities," ICER Working Papers - Applied Mathematics Series 20-2007, ICER - International Centre for Economic Research. [Downloadable!]
  10. Dominiak, Adam & Dürsch, Peter & Lefort, Jean-Philippe, 2009. "A Dynamic Ellsberg Urn Experiment," Working Papers 0487, University of Heidelberg, Department of Economics. [Downloadable!]
  11. John D Hey & Gianna Lotito, 2007. "Naïve, Resolute or Sophisticated? A Study of Dynamic Decision Making," Discussion Papers 07/03, Department of Economics, University of York. [Downloadable!]
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  12. Frank Riedel, 2003. "Dynamic Coherent Risk Measures," Working Papers 03004, Stanford University, Department of Economics. [Downloadable!]
  13. Simon Grant & Atsushi Kajii & Ben Polak, 1999. "Preference for Information and Dynamic Consistency," Cowles Foundation Discussion Papers 1208, Cowles Foundation, Yale University. [Downloadable!]
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