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Naïve, Resolute or Sophisticated? A Study of Dynamic Decision Making

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  • John D Hey
  • Gianna Lotito

Abstract

Dynamically inconsistent decision makers have to decide, implicitly or explicitly, what to do about their dynamic inconsistency. Economic theorists have identified three possible responses – to act naively (thus ignoring the dynamic inconsistency), to act resolutely (not letting their inconsistency affect their behaviour) or to act sophisticatedly (hence taking into account their inconsistency). We use data from a unique experiment (which observes both decisions and evaluations) in order to distinguish these three possibilities. We find that the majority of subjects are either naïve or resolute (with slightly more being naïve) but very few are sophisticated. These results have important implications for predicting the behaviour of people in dynamic situations.

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Bibliographic Info

Paper provided by Department of Economics, University of York in its series Discussion Papers with number 07/03.

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Date of creation: Feb 2007
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Handle: RePEc:yor:yorken:07/03

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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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Fax: (0)1904 323759
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Web page: http://www.york.ac.uk/economics/
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Keywords: Dynamic decision making; naivety; sophistication; resoluteness; dynamic inconsistencies;

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References

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  1. Peter Moffatt & Simon Peters, 2001. "Testing for the Presence of a Tremble in Economic Experiments," Experimental Economics, Springer, vol. 4(3), pages 221-228, December.
  2. Hammond, P.J. & , ., 1987. "Consequentialist foundations for expected utility," CORE Discussion Papers 1987016, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  3. John Hey & Jinkwon Lee, 2005. "Do subjects remember the past?," Applied Economics, Taylor & Francis Journals, vol. 37(1), pages 9-18.
  4. John D. Hey & Massimo Paradiso, 2006. "Preferences Over Temporal Frames In Dynamic Decision Problems: An Experimental Investigation," Manchester School, University of Manchester, vol. 74(2), pages 123-137, 03.
  5. Hammond, Peter J, 1976. "Changing Tastes and Coherent Dynamic Choice," Review of Economic Studies, Wiley Blackwell, vol. 43(1), pages 159-73, February.
  6. Christopher Harris & David Laibson, 1999. "Dynamic Choices of Hyperbolic Consumers," Harvard Institute of Economic Research Working Papers 1886, Harvard - Institute of Economic Research.
  7. Cubitt, Robin P & Starmer, Chris & Sugden, Robert, 1998. "Dynamic Choice and the Common Ratio Effect: An Experimental Investigation," Economic Journal, Royal Economic Society, vol. 108(450), pages 1362-80, September.
  8. Hammond, Peter J, 1989. "Consistent Plans, Consequentialism, and Expected Utility," Econometrica, Econometric Society, vol. 57(6), pages 1445-49, November.
  9. John Hey & Jinkwon Lee, 2005. "Do Subjects Separate (or Are They Sophisticated)?," Experimental Economics, Springer, vol. 8(3), pages 233-265, September.
  10. Matthew Rabin, 1998. "Psychology and Economics," Journal of Economic Literature, American Economic Association, vol. 36(1), pages 11-46, March.
  11. Hammond, Peter J, 1977. "Dynamic Restrictions on Metastatic Choice," Economica, London School of Economics and Political Science, vol. 44(176), pages 337-50, November.
  12. Sarin, Rakesh & Wakker, Peter P, 1998. "Dynamic Choice and NonExpected Utility," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 87-119, November.
  13. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
  14. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
  15. John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer, vol. 8(4), pages 325-345, December.
  16. Beggs, S. & Cardell, S. & Hausman, J., 1981. "Assessing the potential demand for electric cars," Journal of Econometrics, Elsevier, vol. 17(1), pages 1-19, September.
  17. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
  18. Chris Starmer, 2000. "Developments in Non-expected Utility Theory: The Hunt for a Descriptive Theory of Choice under Risk," Journal of Economic Literature, American Economic Association, vol. 38(2), pages 332-382, June.
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Citations

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Cited by:
  1. John Hey & Luca Panaccione, 2011. "Dynamic decision making: what do people do?," Journal of Risk and Uncertainty, Springer, vol. 42(2), pages 85-123, April.
  2. Eling, Martin & Kochanski, Michael, 2012. "Research on Lapse in Life Insurance – What Has Been Done and What Needs to Be Done?," Working Papers on Finance 1224, University of St. Gallen, School of Finance.
  3. Borissov, Kirill, 2013. "Growth and distribution in a model with endogenous time preferences and borrowing constraints," Mathematical Social Sciences, Elsevier, vol. 66(2), pages 117-128.
  4. Aronsson, Thomas & Granlund, David, 2010. "Present-Biased Preferences and Publicly Provided Health Care," HUI Working Papers 41, HUI Research.
  5. A. Nebout, 2014. "Sequential decision making without independence: a new conceptual approach," Theory and Decision, Springer, vol. 77(1), pages 85-110, June.
  6. Amit Kothiyal & Vitalie Spinu & Peter Wakker, 2014. "An experimental test of prospect theory for predicting choice under ambiguity," Journal of Risk and Uncertainty, Springer, vol. 48(1), pages 1-17, February.
  7. Hammond, Peter J & Zank, Horst, 2013. "Rationality and Dynamic Consistency under Risk and Uncertainty," The Warwick Economics Research Paper Series (TWERPS) 1033, University of Warwick, Department of Economics.
  8. Keith Coble & Jayson Lusk, 2010. "At the nexus of risk and time preferences: An experimental investigation," Journal of Risk and Uncertainty, Springer, vol. 41(1), pages 67-79, August.

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