Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/31187 
Year of Publication: 
2008
Series/Report no.: 
Discussion Paper No. 1468
Publisher: 
Northwestern University, Kellogg School of Management, Center for Mathematical Studies in Economics and Management Science, Evanston, IL
Abstract: 
Dynamic consistency leads to Bayesian updating under expected utility. We ask what it implies for the updating of more general preferences. In this paper, we characterize dynamically consistent update rules for preference models satisfying ambiguity aversion. This characterization extends to regret-based models as well. As an application of our general result, we characterize dynamically consistent updating for two important models of ambiguity averse preferences: the ambiguity averse smooth ambiguity preferences (Klibanoþ, Marinacci and Mukerji [Econometrica 73 2005, pp. 1849-1892]) and the variational preferences (Maccheroni, Marinacci and Rustichini [Econometrica 74 2006, pp. 1447-1498]). The latter includes max-min expected utility (Gilboa and Schmeidler [Journal of Mathematical Economics 18 1989, pp. 141-153]) and the multiplier preferences of Hansen and Sargent [American Economic Review 91(2) 2001, pp. 60-66] as special cases. For smooth ambiguity preferences, we also identify a simple rule that is shown to be the unique dynamically consistent rule among a large class of rules that may be expressed as reweightings of Bayes.rule.
Subjects: 
Updating
dynamic consistency
ambiguity
regret
Ellsberg
bayesian
consequentialism
smooth ambiguity
JEL: 
D81
D83
D91
Document Type: 
Working Paper

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