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Testing dynamic consistency and consequentialism under ambiguity

Author

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  • Bleichrodt, Han
  • Eichberger, Jürgen
  • Grant, Simon
  • Kelsey, David
  • Li, Chen

Abstract

Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people’s preferences, we tested them using a variation of Ellsberg’s three-color urn experiment. Subjects were asked to make a choice both before and after they received a signal. We found that most ambiguity neutral subjects satisfied both dynamic consistency and consequentialism and behaved consistent with subjective expected utility with Bayesian updating. The majority of ambiguity averse subjects satisfied consequentialism, but violated dynamic consistency.

Suggested Citation

  • Bleichrodt, Han & Eichberger, Jürgen & Grant, Simon & Kelsey, David & Li, Chen, 2021. "Testing dynamic consistency and consequentialism under ambiguity," European Economic Review, Elsevier, vol. 134(C).
    • Handle: RePEc:eee:eecrev:v:134:y:2021:i:c:s0014292121000404
    DOI: 10.1016/j.euroecorev.2021.103687
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    Cited by:

    1. Kathleen Ngangoué, M., 2021. "Learning under ambiguity: An experiment in gradual information processing," Journal of Economic Theory, Elsevier, vol. 195(C).
    2. Shishkin, Denis & Ortoleva, Pietro, 2023. "Ambiguous information and dilation: An experiment," Journal of Economic Theory, Elsevier, vol. 208(C).

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    More about this item

    Keywords

    Ambiguity; Three-color Ellsberg paradox; Consequentialism; Dynamic consistency;
    All these keywords.

    JEL classification:

    • C72 - Mathematical and Quantitative Methods - - Game Theory and Bargaining Theory - - - Noncooperative Games
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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