Randomization and dynamic consistency

Eichberger, J�rgen; Grant, Simon; Kelsey, David

Abstract

Rai¤a (1961) has suggested that ambiguity aversion will cause a strict preference for randomization. We show that dynamic consistency implies that individuals will be indi¤erent 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 setup are viewed as being resolved before or after the (ambiguous) uncertainty.

Citation

Eichberger, J., Grant, S., & Kelsey, D. (2016). Randomization and dynamic consistency. Economic Theory, 62(3), 547-566. https://doi.org/10.1007/s00199-015-0913-8

• Journal Article Type: Article
• Acceptance Date: Aug 26, 2015
• Online Publication Date: Sep 9, 2015
• Publication Date: 2016-08
• Deposit Date: Jun 8, 2020
• Journal: Economic Theory
• Print ISSN: 0938-2259
• Electronic ISSN: 1432-0479
• Publisher: Springer Verlag
• Peer Reviewed: Peer Reviewed
• Volume: 62
• Issue: 3
• Pages: 547-566
• DOI: https://doi.org/10.1007/s00199-015-0913-8
• Keywords: ambiguity; ex ante and ex post randomization; dynamic consis- tency; smooth ambiguity JEL Classi…cation: D81
• Public URL: https://nottingham-repository.worktribe.com/output/4563826
• Publisher URL: https://link.springer.com/article/10.1007/s00199-015-0913-8