Expectation and Variation in Multi-Period Decisions
Multi-period decisions are decisions which determine an individual's payoffs in several periods in the future. This paper examines the theoretical foundations of the prevalent weighted average assumption. More specifically, we use a multi-period interpretation of the famous Ellsberg paradox in decision under uncertainty to show that in many cases of interest additively-separable functionals (in general) and weighted average ones (in particular) do not seem appropriate for the representation of the decision maker's preferences. We then suggest replacing the sure-thing principle, which may be used to axiomatize a weighted average functional, by a weaker version of it. Using the weakened axiom in Schmeidler's nonadditive measure model (reinterpreted for the multi-period context) yields an axiomatization of a larger class of decision rules which are representable by a weighted average of the utility in each period und the utility variation between each two consecutive periods. The weighted average assumption is a special case of the generalized model, a case in which the decision maker is variation neutral. Similarly, we define and characterize variation aversion and variation liking, and show an example of the economic implications of these properties.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||Sep 1989|
|Publication status:||Published in Econometrica, Econometric Society, 1989, vol. 57, n° 5, pp. 1153-1169|
|Note:||View the original document on HAL open archive server: https://hal-hec.archives-ouvertes.fr/hal-00753240|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
When requesting a correction, please mention this item's handle: RePEc:hal:journl:hal-00753240. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.