Economic Theory: Repeated Choice: A Theory of Stochastic Intertemporal Preferences

Abstract:

We provide a repeated-choice foundation for stochastic choice. An agent chooses from a menu repeatedly over time, generating a time series of choices. We identify the limit frequency of these choices as {\it stochastic choice}. We characterize a tractable model of stochastic intertemporal preferences where the agent repeatedly chooses today's consumption and tomorrow's continuation menu, aware that future preferences will evolve according to a subjective ergodic {\it utility process}. Using our model, we demonstrate how not taking into account the agent's preference for early (late) resolution of uncertainty would lead an analyst to underestimate (resp., overestimate) the agent's risk aversion. Estimation of preferences can be performed by the analyst without explicitly modeling continuation problems (i.e. stochastic choice is \textit{independent of continuation menus}) if and only if the utility process takes on the \textit{standard} additive and separable form. Applications include estimation under dynamic discrete choice.