Dynamic inconsistency under ambiguity: An experiment

Abstract

Abstract 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.