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Dynamic variational preferences. (English) Zbl 1153.91384

Summary: We introduce and axiomatize dynamic variational preferences, the dynamic version of the variational preferences we axiomatized in [F. Maccheroni, M. Marinacci, A. Rustichini, Econometrica 74, No. 6, 1447–1498 (2006; Zbl 1187.91066)], which generalize the multiple priors preferences of I. Gilboa and D. Schmeidler [J. Math. Econ. 18, No. 2, 141–153 (1989; Zbl 0675.90012)], and include the Multiplier Preferences inspired by robust control and first used in macroeconomics by L.P. Hansen and T.J. Sargent [Robust control and model uncertainty, Am. Econ. Rev. 91, 60 – 66 (2001)], as well as the classic Mean Variance Preferences of Markovitz and Tobin. We provide a condition that makes dynamic variational preferences time consistent, and their representation recursive. This gives them the analytical tractability needed in macroeconomic and financial applications. A corollary of our results is that Multiplier Preferences are time consistent, but Mean Variance Preferences are not.

MSC:

91B06 Decision theory
91B08 Individual preferences
93B35 Sensitivity (robustness)
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