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Rationality and dynamic consistency under risk and uncertainty
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Hammond, Peter J. and Zank, Horst (2013) Rationality and dynamic consistency under risk and uncertainty. Working Paper. Coventry, UK: University of Warwick, Department of Economics. Warwick economics research papers series (TWERPS), Volume 2013 (Number 1033).
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Text (Working paper )
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Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
Abstract
For choice with deterministic consequences, the standard rationality hypothesis is ordinality - i.e., maximization of a weak preference ordering. For choice under risk (resp. uncertainty), preferences are assumed to be represented by the objectively (resp. subjectively) expected value of a von Neumann{Morgenstern utility function. For choice under risk, this implies a key independence axiom; under uncertainty, it implies some version of Savage's sure thing principle. This chapter investigates the extent to which ordinality, independence, and the sure thing principle can be derived from more fundamental axioms concerning behaviour in decision trees. Following Cubitt (1996), these principles include dynamic consistency, separability, and reduction of sequential choice, which can be derived in turn from one consequentialist hypothesis applied to continuation subtrees as well as entire decision trees. Examples of behavior violating these principles are also reviewed, as are possible explanations of why such violations are often observed in experiments.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HB Economic Theory | ||||
| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | Risk , Financial risk, Economics -- Mathematical models | ||||
| Series Name: | Warwick economics research papers series (TWERPS) | ||||
| Publisher: | University of Warwick, Department of Economics | ||||
| Place of Publication: | Coventry, UK | ||||
| Official Date: | 2013 | ||||
| Dates: |
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| Volume: | Volume 2013 | ||||
| Number: | Number 1033 | ||||
| Number of Pages: | 34 | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Published | ||||
| Access rights to Published version: | Open Access (Creative Commons) | ||||
| Date of first compliant deposit: | 16 August 2016 | ||||
| Date of first compliant Open Access: | 16 August 2016 |
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