Dynamic Choice Under Ambiguity

60 Pages Posted: 4 Dec 2006

See all articles by Marciano Siniscalchi

Marciano Siniscalchi

Northwestern University - Department of Economics

Date Written: December 8, 2006

Abstract

This paper analyzes sophisticated dynamic choice for ambiguity-sensitive decision makers. It characterizes Consistent Planning via axioms on preferences over decision trees. Furthermore, it shows how to elicit conditional preferences from prior preferences. The key axiom is a weakening of Dynamic Consistency, deemed Sophistication. The analysis accommodates arbitrary decision models and updating rules. Hence, the results indicate that (i) ambiguity attitudes, (ii) updating rules, and (iii) sophisticated dynamic choice are mutually orthogonal aspects of preferences.

As an example, a characterization of prior-by-prior Bayesian updating and Consistent Planning for arbitrary maxmin-expected utility preferences is presented. The resulting sophisticated MEU preferences are then used to analyze the value of information under ambiguity; a basic trade-off between information acquisition and commitment is highlighted.

Keywords: Ambiguity, Dynamic Choice, Sophistication, Value of Information

JEL Classification: D81, D83

Suggested Citation

Siniscalchi, Marciano, Dynamic Choice Under Ambiguity (December 8, 2006). Available at SSRN: https://ssrn.com/abstract=948928 or http://dx.doi.org/10.2139/ssrn.948928

Marciano Siniscalchi (Contact Author)

Northwestern University - Department of Economics ( email )

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