Randomisation and Dynamic Consistency

26 Pages Posted: 26 May 2014

See all articles by Jürgen Eichberger

Jürgen Eichberger

Heidelberg University - Alfred Weber Institute for Economics

Simon Grant

Rice University - Department of Economics; Australian National University

David Kelsey

University of Exeter Business School - Department of Economics

Date Written: April 5, 2014

Abstract

Raiffa-QJE-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

JEL Classification: D81

Suggested Citation

Eichberger, Jürgen and Grant, Simon Harold and Kelsey, David, Randomisation and Dynamic Consistency (April 5, 2014). Available at SSRN: https://ssrn.com/abstract=2441566 or http://dx.doi.org/10.2139/ssrn.2441566

Jürgen Eichberger

Heidelberg University - Alfred Weber Institute for Economics ( email )

Heidelberg, D-69117
Germany

Simon Harold Grant

Rice University - Department of Economics ( email )

6100 South Main Street
Houston, TX 77005
United States
713-348-3332 (Phone)
713-348-6329 (Fax)

Australian National University ( email )

Coombs Building 9
Canberra, Australian Capital Territory 0200
Australia
61-2-6125-4602 (Phone)
61-2-6125-3051 (Fax)

David Kelsey (Contact Author)

University of Exeter Business School - Department of Economics ( email )

Streatham Court
Exeter, Devon EX4 4PU
United Kingdom
013 9226 2536 (Phone)

HOME PAGE: http://people.exeter.ac.uk/dk210/

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