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Dynamic Consistency, Valuable Information and Subjective Beliefs

Galanis, S. ORCID: 0000-0003-4286-7449 (2019). Dynamic Consistency, Valuable Information and Subjective Beliefs (19/02). London, UK: Department of Economics, City, University of London.

Abstract

Ambiguity sensitive preferences must fail either Consequentialism or Dynamic Consistency (DC), two properties that are compatible with subjective expected utility and Bayesian updating, while forming the basis of backward induction and dynamic programming. We examine the connection between these properties in a general environment of convex preferences over monetary acts and find that, far from being incompatible, they are connected in an economically meaningful way. In single-agent decision problems, positive value of information characterises one direction of DC. We propose a weakening of DC and show that one direction is equivalent to weakly valuable information, whereas the other characterises the Bayesian updating of the subjective beliefs which are revealed by trading behavior. In financial markets, we characterize no speculative trade, without requiring any form of Consequentialism, and show that there is weakly negative value of public information in risk-sharing environments with no aggregate uncertainty.

Publication Type: Monograph (Discussion Paper)
Additional Information: Copyright 2019, the author.
Publisher Keywords: Updating, Ambiguity, Dynamic Consistency, Bayesian, Consequentialism, Value of Information, No Trade, Speculative Trade
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
School of Arts & Social Sciences > Economics > Discussion Paper Series
URI: http://openaccess.city.ac.uk/id/eprint/21560
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