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Global and Approximate Global Optimality of Myopic Economic Decisions

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  • Tesfatsion, Leigh S.

Abstract

In actual problem contexts, the time horizon over which plans are formulated must generally be short in relation to the history of the process as a whole. What loss of return is entailed by the use of these relatively short planning horizons? This article develops a general discrete-time dynamic stochastic control model that encompasses many well-known economic models. It derives sufficient conditions in this context for the equivalence of myopic (single period) and global (simultaneous multiple period) expected return maximization, and it provides a bound for the loss in global return when these conditions are not met. It also identifies properties of proxy short-horizon return functions which can be used to partially order them in terms of overall expected return performance. Annotated pointers to related work can be accessed here: http://www2.econ.iastate.edu/tesfatsi/dehome.htm

Suggested Citation

  • Tesfatsion, Leigh S., 1980. "Global and Approximate Global Optimality of Myopic Economic Decisions," Staff General Research Papers Archive 11224, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:11224
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    Keywords

    behavioral economics; dynamic stochastic control; planning horizons;

    JEL classification:

    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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