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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:

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    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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