SMU SOE Seminar Series (November 20, 2025): A Dynamic Theory of Preference for Flexibility

TOPIC:

ABSTRACT

We consider an agent who faces dynamic decision problems and anticipates nonstationary and persistent shocks to risk and time preferences. Taking a preference for infinite-horizon consumption problems as a primitive, we introduce a recursive utility representation that captures the agent's preference for flexibility. In the representation, the agent's anticipation of preference shocks is modeled as an infinite higher-order belief. The characterization of this representation is based on axioms that reflect the agent's anticipation about future preferences in terms of attitudes toward flexibility and intertemporal trade-offs. While the belief in this representation is not uniquely determined in general, it becomes generically unique under a normalization of consumption utilities. Furthermore, the belief remains invariant under a common scaling of consumption utilities.

Click here to view the CV.