Dynamic Variational Preferences
AbstractWe introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in , which generalize the multiple priors preferences of Gilboa and Schmeidler , and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see ), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.
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Bibliographic InfoPaper provided by Collegio Carlo Alberto in its series Carlo Alberto Notebooks with number 1.
Length: 37 pages
Date of creation: 2006
Date of revision:
Publication status: Published in Journal of Economic Theory, 128, 4-44, 2006.
Ambiguity Aversion; Model Uncertainty; Recursive Utility; Robust Control; Time Consistency;
Other versions of this item:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-09-16 (All new papers)
- NEP-CBA-2006-09-16 (Central Banking)
- NEP-CBE-2006-09-16 (Cognitive & Behavioural Economics)
- NEP-DGE-2006-09-16 (Dynamic General Equilibrium)
- NEP-UPT-2006-09-16 (Utility Models & Prospect Theory)
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