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Dynamic Variational Preferences

Fabio Maccheroni, Massimo Marinacci and Aldo Rustichini

No 1, Carlo Alberto Notebooks from Collegio Carlo Alberto

Abstract: We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [21], which generalize the multiple priors preferences of Gilboa and Schmeidler [9], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by Hansen and Sargent (see [11]), as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.

Keywords: Ambiguity Aversion; Model Uncertainty; Recursive Utility; Robust Control; Time Consistency (search for similar items in EconPapers)
JEL-codes: C61 D81 (search for similar items in EconPapers)
Pages: 37 pages
Date: 2006
New Economics Papers: this item is included in nep-cba, nep-cbe, nep-dge and nep-upt
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Published in Journal of Economic Theory, 128, 4-44, 2006.

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