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Randomization and Dynamic Consistency

Author

Listed:
  • Jürgen Eichberger

    (Alfred Weber Institut, Heidelberg University.)

  • Simon Grant

    (School of Economics, University of Queensland.)

  • David Kelsey

    (Department of Economics, University of Exeter)

Abstract

Raiffa (1961) has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indifferent to ex ante randomizations. On the other hand, it is possible for a dynamically-consistent ambiguity averse preference relation to exhibit a strict preference for some ex post randomizations. We argue that our analysis throws some light on the recent debate about paradoxes for the smooth model of ambiguity. We show that these rest on whether the randomizations implicit in the set-up are viewed as being resolved before or after the (ambiguous) uncertainty.

Suggested Citation

  • Jürgen Eichberger & Simon Grant & David Kelsey, 2014. "Randomization and Dynamic Consistency," Discussion Papers 1409, Exeter University, Department of Economics.
  • Handle: RePEc:exe:wpaper:1409
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    File URL: http://people.exeter.ac.uk/cc371/RePEc/dpapers/DP1409.pdf
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    References listed on IDEAS

    as
    1. Peter Klibanoff, 2001. "Stochastically independent randomization and uncertainty aversion," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 18(3), pages 605-620.
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    3. Bade, Sophie, 2011. "Ambiguous act equilibria," Games and Economic Behavior, Elsevier, vol. 71(2), pages 246-260, March.
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    5. Larry G. Epstein, 2010. "A Paradox for the “Smooth Ambiguity” Model of Preference," Econometrica, Econometric Society, vol. 78(6), pages 2085-2099, November.
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    7. Peter Klibanoff & Massimo Marinacci & Sujoy Mukerji, 2012. "On the Smooth Ambiguity Model: A Reply," Econometrica, Econometric Society, vol. 80(3), pages 1303-1321, May.
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    13. Howard Raiffa, 1961. "Risk, Ambiguity, and the Savage Axioms: Comment," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 690-694.
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    Citations

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    Cited by:

    1. Evan Calford, 2017. "Uncertainty Aversion in Game Theory: Experimental Evidence," Purdue University Economics Working Papers 1291, Purdue University, Department of Economics.
    2. repec:spr:joecth:v:63:y:2017:i:4:d:10.1007_s00199-016-0972-5 is not listed on IDEAS
    3. repec:eee:gamebe:v:104:y:2017:i:c:p:666-673 is not listed on IDEAS
    4. Pierpaolo Battigalli & Simone Cerreia-Vioglio & Fabio Maccheroni & Massimo Marinacci, 2017. "Mixed extensions of decision problems under uncertainty," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 63(4), pages 827-866, April.

    More about this item

    Keywords

    ambiguity; ex ante and ex post randomization; dynamic consistency; smooth ambiguity.;

    JEL classification:

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

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