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The recursive approach to time inconsistency. (English) Zbl 1142.90457

Summary: We introduce a new class of finite horizon stochastic decision problems in which preferences change over time, and provide a proof of the existence of a recursively optimal strategy. Recursive optimization techniques dominate many areas of economic dynamics. However, in decision problems in which tastes change over time, the solution technique most commonly applied is not recursive, but rather strategic (subgame perfection). In this paper we argue in favor of the recursive approach, and we take the necessary theoretical steps to make the recursive methodology applicable.

MSC:

90C15 Stochastic programming
90C39 Dynamic programming
91B06 Decision theory
91B62 Economic growth models
91B70 Stochastic models in economics
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