Dynamic inconsistency under ambiguity: An experiment

• Published in: Journal of risk and uncertainty Vol. 67; no. 3; pp. 215 - 238
• Main Authors: Caferra, Rocco, Hey, John D., Morone, Andrea, Santorsola, Marco
• Format: Journal Article
• Language: English
• Published: New York Springer US 01.12.2023; Springer Nature B.V
• Subjects: Ambiguity; Decision makers; Decision making; Economic Theory/Quantitative Economics/Mathematical Methods; Economics; Economics and Finance; Environmental Economics; Expected utility; Incentives; Inconsistency; Microeconomics; Monetary incentives; Money; Operations Research/Decision Theory; Policy making; Myopic; Expected Utility; Ambiguity Box; D90; Resolute; D81; Dynamic inconsistency; Sequential choice; Sophisticated
• ISSN: 0895-5646; 1573-0476
• DOI: 10.1007/s11166-023-09418-y

This paper experimentally investigates the potential existence of dynamically inconsistent individuals in a situation of ambiguity. The experiment involves participants making two sequential decisions concerning the allocation of a sum of money, with an ambiguous move by Nature occurring after first decision, and again after the second. We conducted two between-subject sessions: one incentivised and one unincentivised. By analysing the resulting data, we are able to classify participants into four distinct decision-making types: Myopic, Resolute, Sophisticated and Expected Utility (EU). Our results suggest that a significant proportion of the participants do not exhibit dynamic inconsistency being either Resolute, Sophisticated or EU. We discuss how monetary incentives can change the dynamic consistency of decision-makers and the salience of the Ambiguity. Differently from the incentivised treatment, we detect a slight increase of the proportion of Myopic behaviour in the hypothetical case, suspecting that incentives might affect dynamic consistency. A noteworthy observation is that, in the majority of cases, ambiguity tends to simplify to risk in the absence of monetary incentives. These findings have implications for economic decision-making and policymaking. By identifying the different types of decision-makers and understanding how they make choices, we can develop more effective strategies to promote desirable outcomes.