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Randomization and Dynamic Consistency

Jürgen Eichberger, Simon Grant and David Kelsey
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Jürgen Eichberger: Alfred Weber Institut, Heidelberg University.

No 1409, Discussion Papers from University of Exeter, Department of Economics

Abstract: Raiffa (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 about paradoxes for the smooth model of ambiguity. We show that these rest 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: 2014
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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https://exetereconomics.github.io/RePEc/dpapers/DP1409.pdf (application/pdf)

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Journal Article: Randomization and dynamic consistency (2016) Downloads
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