Testing dynamic consistency and consequentialism under ambiguity
Accounting for ambiguity aversion in dynamic decisions generally implies that either dy- namic consistency or consequentialism must be given up. To gain insight into which of these principles better describes people’s preferences, we tested them using a variation of Ellsberg’s three-color urn experiment. Subjects were asked to make a choice both before and after they received a signal. We found that most ambiguity neutral subjects satisfied both dynamic consistency and consequentialism and behaved consistent with subjective expected utility with Bayesian updating. The majority of ambiguity averse subjects satis- fied consequentialism, but violated dynamic consistency.