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Dynamic consistency and ambiguity: A reappraisal

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  • Hill, Brian
Abstract
The famous conflict between dynamic consistency and ambiguity purportedly undermines these models' normative credibility, and challenges their use in economic applications. Dynamic consistency concerns preferences over contingent plans: so what counts are the contingencies the decision maker envisages – and plans for – rather than independently fixed contingencies, as implicitly assumed in standard formalisations. An appropriate formulation of dynamic consistency resolves the aforementioned conflict, hence undermining the criticisms of ambiguity models based on it. Moreover, it provides a principled justification for the restriction to certain families of beliefs in applications of these models in dynamic choice problems. Finally, it supports a new analysis of the value of information under ambiguity, showing that decision makers may only turn down information if it has an opportunity cost, in terms of the compromising of information they had otherwise expected to receive.

Suggested Citation

  • Hill, Brian, 2020. "Dynamic consistency and ambiguity: A reappraisal," Games and Economic Behavior, Elsevier, vol. 120(C), pages 289-310.
  • Handle: RePEc:eee:gamebe:v:120:y:2020:i:c:p:289-310
    DOI: 10.1016/j.geb.2019.12.012
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    Cited by:

    1. Federica Ceron & Vassili Vergopoulos, 2020. "Recursive objective and subjective multiple priors," Post-Print halshs-02900497, HAL.
    2. Xiaoyu Cheng, 2020. "Ambiguous Persuasion: An Ex-Ante Formulation," Papers 2010.05376, arXiv.org, revised Nov 2023.
    3. Hill, Brian, 2022. "Updating confidence in beliefs," Journal of Economic Theory, Elsevier, vol. 199(C).
    4. Pahlke, Marieke, 2022. "Dynamic consistency in incomplete information games with multiple priors," Games and Economic Behavior, Elsevier, vol. 133(C), pages 85-108.
    5. Ceron, Federica & Vergopoulos, Vassili, 2022. "Objective rationality and recursive multiple priors," Journal of Mathematical Economics, Elsevier, vol. 102(C).
    6. Bade, Sophie, 2022. "Dynamic semi-consistency," Games and Economic Behavior, Elsevier, vol. 134(C), pages 117-126.
    7. Federica Ceron & Vassili Vergopoulos, 2020. "Recursive objective and subjective multiple priors," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-02900497, HAL.
    8. Federica Ceron & Vassili Vergopoulos, 2020. "Recursive objective and subjective multiple priors," Documents de travail du Centre d'Economie de la Sorbonne 20008, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
    9. Mark Whitmeyer, 2023. "Blackwell-Monotone Updating Rules," Papers 2302.13956, arXiv.org, revised Nov 2024.
    10. Tommi Ekholm & Erin Baker, 2022. "Multiple Beliefs, Dominance and Dynamic Consistency," Management Science, INFORMS, vol. 68(1), pages 529-540, January.
    11. Federica Ceron & Vassili Vergopoulos, 2020. "Recursive objective and subjective multiple priors," Working Papers halshs-02563318, HAL.
    12. Federica Ceron & Vassili Vergopoulos, 2020. "Recursive objective and subjective multiple priors," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-02563318, HAL.
    13. Pahlke, Marieke, 2022. "Dynamic Consistency and Ambiguous Communication," VfS Annual Conference 2022 (Basel): Big Data in Economics 264027, Verein für Socialpolitik / German Economic Association.

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    More about this item

    Keywords

    Decision under uncertainty; Dynamic consistency; Dynamic choice; Envisaged contingency; Ambiguity; Value of information;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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