Dynamically consistent choice and the revelation of Strotz–Pollak equilibrium

Dynamically consistent choice and the revelation of Strotz–Pollak equilibrium

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Article ID: iaor1999307
Country: Netherlands
Volume: 80
Issue: 1
Start Page Number: 67
End Page Number: 84
Publication Date: Jun 1998
Journal: Annals of Operations Research
Authors:
Keywords: choice theory
Abstract:

The purpose of this essay is to provide a revealed preference analysis of the concept of ‘dynamically consistent’ choice in a decision tree without chance nodes. It is shown that myopic rationality with respect to a stationary weak order is characterized by Arrow's version of the Weak Axiom of Revealed Preference, and that perfect rationality is characterized by Chernoff's condition Alpha. Since the latter concept of dynamic rationality is based upon the selection of a Strotz–Pollak equilibrium as a game-theoretic solution, it is concluded that condition Alpha alone provides a proper choice-theoretic definition of ‘dynamic consistency’.

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