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Randomization and dynamic consistency

Jürgen Eichberger, Simon Grant and David Kelsey
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Jürgen Eichberger: Universität Heidelberg

Economic Theory, 2016, vol. 62, issue 3, No 6, 547-566

Abstract: Abstract Raiffa (Q J Econ 75:690–694, 1961) has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indifferent to ex ante randomizations. On the other hand, it is possible for a dynamically consistent ambiguity averse preference relation to exhibit a strict preference for some ex post randomizations. We argue that our analysis throws some light on the recent debate on the status of the smooth model of ambiguity This debate rests on whether the randomizations implicit in the set-up are viewed as being resolved before or after the (ambiguous) uncertainty.

Keywords: Ambiguity; Ex ante and ex post randomization; Dynamic consistency; Smooth ambiguity (search for similar items in EconPapers)
JEL-codes: D81 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (15)

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DOI: 10.1007/s00199-015-0913-8

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