Theory and Decision

, Volume 77, Issue 1, pp 85–110 | Cite as

Sequential decision making without independence: a new conceptual approach

Article

Abstract

This paper presents a critical reflection on dynamic consistency as commonly used in economics and decision theory, and on the difficulty to test it experimentally. It distinguishes between the uses of the term dynamic consistency in order to characterize two different properties: the first accounts for the neutrality of individual preferences towards the timing of resolution of uncertainty whereas the second guarantees that a strategy chosen at the beginning of a sequential decision problem is immune to any reevaluation and will effectively be implemented from then on in the decision problem. Although these two properties are equivalent under expected utility (EU), this is not the case under non-EU. Building on the possible characteristics of individual dynamic preferences under risk, this paper proposes a conceptual categorization, that is experimentally testable, of possible sequential decision making behaviors of non-EU maximizers.

Keywords

Risk Independence axiom Dynamic consistency Consequentialism Sequential decision making 

JEL Classification

C91 D81 

References

  1. Allais, M. (1953). Le comportement de l homme rationnel devant le risqueâ: Critique des postulats et axiomes de l ecole amèricaine. Econometrica, 21, 503–546.Google Scholar
  2. Bardsley, N., Cubitt, R., Loomes, G., Moffat, P., Starmer, C., & Sugden, R. (2010). Experimental economics: Rethinking the rules. Princeton: Princeton University Press.Google Scholar
  3. Bradley, R. (2009). Becker’s thesis and three models of preference change. Politics, Philosophy & Economics, 8(2), 223–242.Google Scholar
  4. Burks, A. W. (1977). Chance, cause, reason. Chicago: University of Chicago Press.Google Scholar
  5. Cubitt, R. P., Starmer, C., & Sugden, R. (1998). Dynamic choice and the common ratio effect: An experimental investigation. The Economic Journal, 108(450), 1362–1380.CrossRefGoogle Scholar
  6. Gauthier, D. (1997). Resolute choice and rational deliberation: A critique and a defense. Noûs, 31(1), 1–25.CrossRefGoogle Scholar
  7. Hammond, P. J. (1988). Consequentialist foundations for expected utility. Theory and Decision, 25, 25–78.CrossRefGoogle Scholar
  8. Hammond, P. J. (1989). Consistent plans, consequentialism, and expected utility. Econometrica, 57(6), 1445–1449.CrossRefGoogle Scholar
  9. Hazen, G. B. (1987). Does rolling back decision trees really require the independence axiom? Management Science, 33(6), 807–809.CrossRefGoogle Scholar
  10. Hey, J., & Lotito, G. (2009). Naive, resolute or sophisticated? A study of dynamic decision making. Journal of Risk and Uncertainty, 38(1), 1–25.Google Scholar
  11. Kahneman, D., & Tversky, A. (1979). Prospect theory: An analysis of decision under risk. Econometrica, 47, 263–291.CrossRefGoogle Scholar
  12. Karni, E., & Safra, Z. (1989). Dynamic consistency, revelations in auctions and the structure of preferences. The Review of Economic Studies, 56(3), 421–433.CrossRefGoogle Scholar
  13. Karni, E., & Schmeidler, D. (1991). Atemporal dynamic consistency and expected utility theory. Journal of Economic Theory, 54(2), 401–408.CrossRefGoogle Scholar
  14. Kreps, D. M., & Porteus, E. L. (1978). Temporal resolution of uncertainty and dynamic choice theory. Econometrica, 46(1), 185–200.CrossRefGoogle Scholar
  15. LaValle, I. H., & Wapman, K. R. (1986). Rolling back decision trees requires the independence axiom!. Management Science, 32(3), 382–385.CrossRefGoogle Scholar
  16. Machina, M. J. (1989). Dynamic consistency and non-expected utility models of choice under uncertainty. Journal of Economic Literature, 27(4), 1622–1668.Google Scholar
  17. McClennen, E. F. (1990). Rationality and dynamic choice: Foundational explorations. Cambridge: Cambridge University Press.Google Scholar
  18. Nebout, A., & Dubois, D. (2012). When allais meets ulysses: Dynamic consistency and the certainty effect. Working Papers 09-30, LAMETA, University of Montpellier.Google Scholar
  19. Nebout, A., & Willinger, M. (2012). Categorizing behavioral strategies: an individualized experiment. Work in progress, LAMETA, University of Montpellier.Google Scholar
  20. Nielsen, T. D., & Jaffray, J.-Y. (2006). Dynamic decision making without expected utility: An operational approach. European Journal of Operational Research, 169(1), 226–246.CrossRefGoogle Scholar
  21. O’Donoghue, T., & Rabin, M. (1999). Doing it now or later. The American Economic Review, 89(1), 103–124.CrossRefGoogle Scholar
  22. Rabinowicz, W. (1995). To have one’s cake and eat it, too: Sequential choice and expected-utility violations. Journal of Philosophy, 92(11), 586–620.CrossRefGoogle Scholar
  23. Raiffa, H. (1968). Decision analysis—Introductory lectures on choices under uncertainty. Reading, MA: Addison-Wesley.Google Scholar
  24. Sarin, R., & Wakker, P. (1994). Folding back in decision tree analysis. Management Science, 40(5), 625–628.CrossRefGoogle Scholar
  25. Sarin, R., & Wakker, P. P. (1998). Dynamic choice and nonexpected utility. Journal of Risk and Uncertainty, 17(2), 87–119.CrossRefGoogle Scholar
  26. Seidenfeld, T. (1988). Decision theory without “independence” or without “ordering”. Economics and Philosophy, 4(2), 267–290.Google Scholar
  27. Siniscalchi, M. (2011). Dynamic choice under ambiguity. Theoretical Economics, 6(3), 379–421.CrossRefGoogle Scholar
  28. Strotz, R. H. (1955). Myopia and inconsistency in dynamic utility maximization. The Review of Economic Studies, 23(3), 165–180.CrossRefGoogle Scholar
  29. Volij, O. (1994). Dynamic consistency, consequentialism and reduction of compound lotteries. Economics Letters, 46(2), 121–129. Google Scholar
  30. von Neumann, J., & Morgenstern, O. (1947). Theory of games and economic behavior (2nd ed.). Princeton: Princeton University Press.Google Scholar
  31. Wakker, P. (1999). Justifying Bayesianism by dynamic decision principles. Working paper, Medical Decision Making Unit, Leiden University Medical Center, The Netherlands.Google Scholar

Copyright information

© Springer Science+Business Media New York 2013

Authors and Affiliations

  1. 1.LAMETA—CNRS, UMR5474 LAMETAMontpellierFrance
  2. 2.GREG-HEC—CNRS, UMR2959Jouy en JosasFrance

Personalised recommendations