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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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    References listed on IDEAS

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    1. Wahl, Thomas I. & Hayes, Dermot J. & Johnson, Stanley R., 1992. "Impacts Of Liberalizing The Japanese Pork Market," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(01), July.
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    5. Lence, Sergio H. & Hayes, Dermot J., 1995. "Land Allocation in the Presence of Estimation Risk," Staff General Research Papers Archive 995, Iowa State University, Department of Economics.
    6. Daniel J. Phaneuf & Catherine L. Kling & Joseph A. Herriges, 2000. "Estimation and Welfare Calculations in a Generalized Corner Solution Model with an Application to Recreation Demand," The Review of Economics and Statistics, MIT Press, pages 83-92.
    7. Bruce A. Babcock & Alfred M. Blackmer, 1994. "The Ex Post Relationship between Growing Conditions and Optimal Fertilizer Levels," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 16(3), pages 353-362.
    8. Babcock, Bruce A., 1992. "Effects of Uncertainty on Optimal Nitrogen Applications (The)," Staff General Research Papers Archive 10588, Iowa State University, Department of Economics.
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    11. Babcock, Bruce A. & Carriquiry, Alicia L. & Stern, Hal S., 1996. "Evaluation of Soil Test Information in Agricultural Decision-Making," Staff General Research Papers Archive 1139, Iowa State University, Department of Economics.
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    More about this item

    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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