Introduction

Tomas Bjork, Mariana Khapko () and Agatha Murgoci ()
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Mariana Khapko: University of Toronto
Agatha Murgoci: Ørsted

Chapter Chapter 1 in Time-Inconsistent Control Theory with Finance Applications, 2021, pp 1-10 from Springer

Abstract: Abstract In this chapter we introduce the concept of time inconsistency in dynamic choice problems. We start by reviewing the key ideas of dynamic programming and listing the main reasons for the time consistency in a given problem. We then present a number of seemingly simple examples from financial economics in which time consistency fails to hold. To tackle these (and similar problems), we outline the different approaches developed in the literature for handling time inconsistency in a dynamic stochastic control setting. In this book, we take the game-theoretic approach and look for subgame-perfect equilibrium strategies. Additionally, we emphasize that, similar to control problems, a stopping problem can be time inconsistent if it does not admit a Bellman optimality principle.

Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprfcp:978-3-030-81843-2_1

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DOI: 10.1007/978-3-030-81843-2_1

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