Dynamic Consistency, Valuable Information and Subjective Beliefs

Economic Theory, 71, 1467–1497

32 Pages Posted: 31 Mar 2016 Last revised: 17 Sep 2022

Date Written: February 14, 2021

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.

Keywords: Updating, Ambiguity, Dynamic Consistency, Bayesian, Consequentialism, Value of Information, No Trade, Speculative Trade

JEL Classification: D81, D83, D91

Suggested Citation

Galanis, Spyros, Dynamic Consistency, Valuable Information and Subjective Beliefs (February 14, 2021). Economic Theory, 71, 1467–1497, Available at SSRN: https://ssrn.com/abstract=2756612 or http://dx.doi.org/10.2139/ssrn.2756612

Spyros Galanis (Contact Author)

Durham University ( email )

Durham, DH1 3LE
Great Britain

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
106
Abstract Views
1,040
Rank
460,172
PlumX Metrics