Testing dynamic consistency and consequentialism under ambiguity

Han Bleichrodt, Jürgen Eichberger, Simon Grant, David Kelsey, Chen Li*

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

1 Citation (Scopus)
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Abstract

Accounting for ambiguity aversion in dynamic decisions generally implies that either dynamic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people's preferences, we tested them using a variation of Ellsberg's three-color urn experiment. Subjects were asked to make a choice both before and after they received a signal. We found that most ambiguity neutral subjects satisfied both dynamic consistency and consequentialism and behaved consistent with subjective expected utility with Bayesian updating. The majority of ambiguity averse subjects satisfied consequentialism, but violated dynamic consistency.

Original languageEnglish
Article number103687
JournalEuropean Economic Review
Volume134
DOIs
Publication statusPublished - May 2021

Bibliographical note

Funding Information:
We are grateful to editors Steffen Huck and David Levine, an associate editor, and 4 reviewers for their helpful suggestions on previous versions of our paper. The authors would like to thank the Erasmus Research Institute of Management and the Erasmus School of Economics for funding the experiment reported in this paper.

Publisher Copyright:
© 2021

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