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Dynamic Consistency, Subjective Beliefs and Valuable Information

Galanis, S. ORCID: 0000-0003-4286-7449 (2021). Dynamic Consistency, Subjective Beliefs and Valuable Information. Economic Theory, 71, pp. 1467-1497. doi: 10.1007/s00199-021-01351-y

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.

Publication Type: Article
Additional Information: This article is licensed under a Creative Commons Attribution 4.0 International License, which permits use, sharing, adaptation, distribution and reproduction in any medium or format, as long as you give appropriate credit to the original author(s) and the source, provide a link to the Creative Commons licence, and indicate if changes were made. The images or other third party material in this article are included in the article’s Creative Commons licence, unless indicated otherwise in a credit line to the material. If material is not included in the article’s Creative Commons licence and your intended use is not permitted by statutory regulation or exceeds the permitted use, you will need to obtain permission directly from the copyright holder. To view a copy of this licence, visit http://creativecommons.org/licenses/by/4.0/.
Publisher Keywords: Updating, Ambiguity, Dynamic Consistency, Bayesian, Consequentialism, Value of Information
Subjects: H Social Sciences > HB Economic Theory
Departments: School of Arts & Social Sciences > Economics
Date available in CRO: 24 Feb 2021 15:39
Date deposited: 24 February 2021
Date of acceptance: 11 February 2021
Date of first online publication: 2 March 2021
URI: https://openaccess.city.ac.uk/id/eprint/25717
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