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Naive, resolute or sophisticated? A study of dynamic decision making

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  • John Hey

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  • 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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Suggested Citation

  • John Hey & Gianna Lotito, 2009. "Naive, resolute or sophisticated? A study of dynamic decision making," Journal of Risk and Uncertainty, Springer, vol. 38(1), pages 1-25, February.
  • Handle: RePEc:kap:jrisku:v:38:y:2009:i:1:p:1-25 DOI: 10.1007/s11166-008-9058-5
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    References listed on IDEAS

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    1. John Hey, 2005. "Why We Should Not Be Silent About Noise," Experimental Economics, Springer;Economic Science Association, vol. 8(4), pages 325-345, December.
    2. 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.
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    8. Quiggin, John, 1982. "A theory of anticipated utility," Journal of Economic Behavior & Organization, Elsevier, vol. 3(4), pages 323-343, December.
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    13. Sarin, Rakesh & Wakker, Peter P, 1998. "Dynamic Choice and NonExpected Utility," Journal of Risk and Uncertainty, Springer, vol. 17(2), pages 87-119, November.
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    Cited by:

    1. Martin Eling & Michael Kochanski, 2013. "Research on lapse in life insurance: what has been done and what needs to be done?," Journal of Risk Finance, Emerald Group Publishing, vol. 14(4), pages 392-413, August.
    2. 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.
    3. Guo, Jang-Ting & Krause, Alan, 2015. "Dynamic nonlinear income taxation with quasi-hyperbolic discounting and no commitment," Journal of Economic Behavior & Organization, Elsevier, vol. 109(C), pages 101-119.
    4. repec:kap:theord:v:83:y:2017:i:2:d:10.1007_s11238-017-9592-1 is not listed on IDEAS
    5. Robert Nuscheler & Kerstin Roeder, 2016. "To Vaccinate or to Procrastinate? That is the Prevention Question," Health Economics, John Wiley & Sons, Ltd., vol. 25(12), pages 1560-1581, December.
    6. Aronsson, Thomas & Sjögren, Tomas, 2016. "Quasi-hyperbolic discounting, paternalism and optimal mixed taxation," Mathematical Social Sciences, Elsevier, vol. 84(C), pages 24-36.
    7. Maria J. Ruiz Martos, 2017. "Individual Dynamic Choice Behaviour and the Common Consequence Effect," ThE Papers 17/01, Department of Economic Theory and Economic History of the University of Granada..
    8. Pan, Jinrui & Webb, Craig S. & Zank, Horst, 2015. "An extension of quasi-hyperbolic discounting to continuous time," Games and Economic Behavior, Elsevier, vol. 89(C), pages 43-55.
    9. Aronsson, Thomas & Sjögren, Tomas, 2014. "Tax policy and present-biased preferences: Paternalism under international capital mobility," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 298-316.
    10. 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.
    11. 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.
    12. Jinrui Pan & Craig Webb & Horst Zank, 2013. "Discounting the Subjective Present and Future," The School of Economics Discussion Paper Series 1305, Economics, The University of Manchester.
    13. 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.
    14. A. Nebout, 2014. "Sequential decision making without independence: a new conceptual approach," Theory and Decision, Springer, vol. 77(1), pages 85-110, June.
    15. Antoine Nebout & Marc Willinger, 2014. "Are Non-Expected Utility individuals really Dynamically Inconsistent? Experimental Evidence," Working Papers 14-08, LAMETA, Universtiy of Montpellier, revised Jul 2014.
    16. Aronsson, Thomas & Granlund, David, 2010. "Present-Biased Preferences and Publicly Provided Health Care," HUI Working Papers 41, HUI Research.
    17. 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.

    More about this item

    Keywords

    Dynamic decision making; Naivety; Sophistication; Resoluteness; Dynamic inconsistencies; D90; D80; C91;

    JEL classification:

    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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