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Dynamic consistency and ambiguity: A reappraisal

Brian Hill

Games and Economic Behavior, 2020, vol. 120, issue C, 289-310

Abstract: The famous conflict between dynamic consistency and ambiguity purportedly undermines these models' normative credibility, and challenges their use in economic applications. Dynamic consistency concerns preferences over contingent plans: so what counts are the contingencies the decision maker envisages – and plans for – rather than independently fixed contingencies, as implicitly assumed in standard formalisations. An appropriate formulation of dynamic consistency resolves the aforementioned conflict, hence undermining the criticisms of ambiguity models based on it. Moreover, it provides a principled justification for the restriction to certain families of beliefs in applications of these models in dynamic choice problems. Finally, it supports a new analysis of the value of information under ambiguity, showing that decision makers may only turn down information if it has an opportunity cost, in terms of the compromising of information they had otherwise expected to receive.

Keywords: Decision under uncertainty; Dynamic consistency; Dynamic choice; Envisaged contingency; Ambiguity; Value of information (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.geb.2019.12.012

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