Boundedly rational backward induction

Shaowei Ke

Theoretical Economics, 2019, vol. 14, issue 1

Abstract: This paper proposes simple axioms that characterize a generalization of backward induction. At any node of a decision tree, the decision maker looks forward a fixed number of stages perfectly. Beyond that, the decision maker aggregates continuation values according to a function that captures reasoning under unpredictability. The model is uniquely identified from the decision maker's preference over decision trees. Confronting a decision tree, the decision maker iteratively revises her plan for the future as she moves forward in the decision tree. A comparative measure of unpredictability aversion and several examples are discussed.

Keywords: Dynamic choice; imperfect foresight; time inconsistency (search for similar items in EconPapers)
JEL-codes: D00 (search for similar items in EconPapers)
Date: 2019-01-30
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Citations: View citations in EconPapers (10)

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