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Dynamic consistency and rectangularity for the smooth ambiguity model

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  • Savochkin, Andrei
  • Shklyaev, Alexander
  • Galatenko, Alexey

Abstract

We study the Smooth Ambiguity decision criterion in the dynamic setting to understand when it can satisfy the Dynamic Consistency and Consequentialism properties. These properties allow one to rewrite the decision criterion recursively and solve for optimal decisions by Dynamic Programming. Our result characterizes the possibility of having these properties through a condition that resembles Epstein and Schneider's (2003) rectangularity condition for the maxmin model. At the same time, we show that Dynamic Consistency and Consequentialism can be achieved for Smooth Ambiguity preferences in a narrower set of scenarios than one would hope for.

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  • Savochkin, Andrei & Shklyaev, Alexander & Galatenko, Alexey, 2025. "Dynamic consistency and rectangularity for the smooth ambiguity model," Journal of Economic Theory, Elsevier, vol. 225(C).
    • Handle: RePEc:eee:jetheo:v:225:y:2025:i:c:s0022053125000377
    DOI: 10.1016/j.jet.2025.105991
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    Cited by:

    1. Marinacci Massimo & Principi Giulio & Stanca Lorenzo, 2023. "Recursive Preferences and Ambiguity Attitudes," Working papers 082, Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino.
    2. Massimo Marinacci & Giulio Principi & Lorenzo Stanca, 2023. "Recursive Preferences and Ambiguity Attitudes," Carlo Alberto Notebooks 695 JEL Classification: C, Collegio Carlo Alberto.
    3. Massimo Marinacci & Giulio Principi & Lorenzo Stanca, 2023. "Recursive Preferences and Ambiguity Attitudes," Papers 2304.06830, arXiv.org, revised Jul 2024.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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