Q.2 (SEU) Suppose that there are three states of the world S = {81, 82, 83}, corresponding to the economy being in a good, medium
Q.2 (SEU) Suppose that there are three states of the world S = {81, 82, 83}, corresponding to the economy being in a good, medium and bad state. In sce- nario A, an SEU agent has a preference :34 over acts (eg assets) that is rep- resented by some utility index n and prior beliefs p over S. In scenario B, she obtains information from an expert, who informs her that \"the economy is not in the bad state 83\" but cannot say anything more specic. This information does not change the agent's u, but it does lead her to update her beliefs so that it becomes a different belief q over S that recognizes that 33 is impossible and rescales her prior beliefs so that : 10(82) 10(31) +1192)- 19(81) m \"'d \"82) = 9(83) = 0: 9(31) = Her new preference :3 over acts is represented by u and q. Prove that these preference are dynamically consistent in the sense that for any outcomes 32,1),2, 81 33 31 y 81 33 81 y 32 3; 23A 32 3: i=1 32 y 83 Z 83 Z 83 Z 83 2 That is, her ranking of assets that pay a xed 2 in state 83 is unaected by the information. [The term \"dynamical consistency\" was dened differently in the topic of intertemporal choice, but the idea is similar: the prior self and the self with the information do not disagree in how they think about 31 and 82]. [5]
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