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Special Seminar

Time-Consistent Stopping

Location:  Hill 705
Date & time: Tuesday, 26 January 2016 at 12:00PM - 12:11PM

Yu-Jui Huang, Dublin City University: We study stopping problems for diffusion processes, under non-exponential discounting. Our framework particularly captures decreasing impatience, a phenomenon well-documented in Behavioral Finance. Since non-exponential discounting induces time inconsistency, one should not naively employ optimal stopping times from classical theory, but rather look for equilibrium stopping policies under a game-theoretic setting. We provide a precise definition of subgame perfect Nash equilibriums in an intertemporal game among current and future selves. For time-inconsistent stopping problems, this is the first time a formulation of equilibrium is established in continuous time. Fixed-point iterations are carried out to search for equilibriums. Under appropriate conditions, the iteration is decreasing and indeed converges to an equilibrium. More importantly, the fixed-point iteration reveals a clear connection between a naive agent (who applies optimal stopping times) and a sophisticated one (who employs equilibrium policies). This connection is new in the literature of time-inconsistent problems.

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Department of Mathematics

Department of Mathematics
Rutgers University
Hill Center - Busch Campus
110 Frelinghuysen Road
Piscataway, NJ 08854-8019, USA

Phone: +1.848.445.2390
Fax: +1.732.445.5530