Recursive Preferences and Ambiguity Attitudes

Massimo Marinacci (), Giulio Principi () and Lorenzo Stanca ()
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Massimo Marinacci: Department of Decision Sciences and IGIER, Bocconi University, Italy;
Giulio Principi: Department of Economics, New York University, USA;
Lorenzo Stanca: Department of Economics, Social Studies, Applied Mathematics and Statistics (ESOMAS) and Collegio Carlo Alberto, University of Torino, Italy;

No 82, Working papers from Department of Economics, Social Studies, Applied Mathematics and Statistics (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche), University of Torino

Abstract: We illustrate the strong implications of recursivity, a standard assumption in dynamic environments, on attitudes toward uncertainty. In intertemporal consumption choice problems, recursivity always implies constant absolute ambiguity aversion (CAAA) when applying the standard dynamic extension of monotonicity. Our analysis also yields a functional equation called ``generalized rectangularity", as it generalizes the standard notion of rectangularity for recursive maxmin preferences to general certainty equivalents. Our results highlight that if uncertainty aversion is modeled as a form of convexity of preferences, recursivity limits us to only recursive variational preferences.

Keywords: Dynamic choice; Recursive utility; uUncertainty aversion; Absolute attitudes; Generalized rectangularity. (search for similar items in EconPapers)
JEL-codes: C61 D81 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2023-04
New Economics Papers: this item is included in nep-dcm, nep-mic and nep-upt
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