Repeated Choice: A Theory of Stochastic Intertemporal Preferences

More on Jay Lu

Abstract: We provide a repeated-choice foundation for stochastic choice. We obtain necessary and sufficient conditions under which an agent’s observed stochastic choice can be represented as a limit frequency of the agent’s choice over time. In the representation, the agent repeatedly chooses today’s consumption and tomorrow’s continuation menu, aware that future preferences will evolve according to a subjective ergodic 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 independent of continuation menus) if and only if the utility process takes on the standard additive and separable form. Applications include dynamic discrete choice models even when agents have non-standard intertemporal preferences.