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Self-coordination in time inconsistent stochastic decision problems: A planner–doer game framework

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  • Cui, Xiangyu
  • Li, Duan
  • Shi, Yun

Abstract

Time inconsistency has been a thorny issue in many economic and financial decision making problems, especially when risk measures are involved in performance criteria. We develop in this paper a two-tier planner–doer game framework with self-coordination. By aligning the global interest of the planner and the local interests of the doers by applying suitable penalty functions, a degree of internal harmony (measured quantitatively by the expected cost of self-coordination) can be achieved by the self-coordination policy. We establish an axiom system for modified preferences, under which the self-coordination policy can be obtained by solving a corresponding optimization problem. We then apply our game framework successfully in dynamic mean-variance portfolio selection.

Suggested Citation

  • Cui, Xiangyu & Li, Duan & Shi, Yun, 2017. "Self-coordination in time inconsistent stochastic decision problems: A planner–doer game framework," Journal of Economic Dynamics and Control, Elsevier, vol. 75(C), pages 91-113.
    • Handle: RePEc:eee:dyncon:v:75:y:2017:i:c:p:91-113
    DOI: 10.1016/j.jedc.2016.12.001
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    Cited by:

    1. Chen, Lv & Shen, Yang & Su, Jianxi, 2020. "A continuous-time theory of reinsurance chains," Insurance: Mathematics and Economics, Elsevier, vol. 95(C), pages 129-146.
    2. Alain Bensoussan & Kwok Chuen Wong & Sheung Chi Phillip Yam, 2019. "A paradox in time-consistency in the mean–variance problem?," Finance and Stochastics, Springer, vol. 23(1), pages 173-207, January.
    3. Cui, Xiangyu & Gao, Jianjun & Shi, Yun & Zhu, Shushang, 2019. "Time-consistent and self-coordination strategies for multi-period mean-Conditional Value-at-Risk portfolio selection," European Journal of Operational Research, Elsevier, vol. 276(2), pages 781-789.
    4. Ishak Alia & Farid Chighoub & Nabil Khelfallah & Josep Vives, 2021. "Time-Consistent Investment and Consumption Strategies under a General Discount Function," JRFM, MDPI, vol. 14(2), pages 1-27, February.

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    More about this item

    Keywords

    G11; C7; Time inconsistency; Self-coordination; Two-tier planner–doer game framework; Commitment by punishment; Cost of self-coordination; Dynamic mean-variance formulation;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • C7 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory

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