Dynamic approaches for some time-inconsistent optimization problems
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comparison principledualitystochastic maximum principlemaster equationtime inconsistencydynamic programming principlepath derivativedynamic utility
Stochastic ordinary differential equations (aspects of stochastic analysis) (60H10) Optimality conditions for problems involving randomness (49K45) Dynamic programming in optimal control and differential games (49L20) Financial applications of other theories (91G80) Optimal stochastic control (93E20) PDEs on infinite-dimensional (e.g., function) spaces (= PDEs in infinitely many variables) (35R15) Duality theory (optimization) (49N15) Social and behavioral sciences: general topics (91C99)
Abstract: In this paper we investigate possible approaches to study general time-inconsistent optimization problems without assuming the existence of optimal strategy. This leads immediately to the need to refine the concept of time-consistency as well as any method that is based on Pontryagin's Maximum Principle. The fundamental obstacle is the dilemma of having to invoke the {it Dynamic Programming Principle} (DPP) in a time-inconsistent setting, which is contradictory in nature. The main contribution of this work is the introduction of the idea of the "dynamic utility" under which the original time inconsistent problem (under the fixed utility) becomes a time consistent one. As a benchmark model, we shall consider a stochastic controlled problem with multidimensional backward SDE dynamics, which covers many existing time-inconsistent problems in the literature as special cases, and we argue that the time inconsistency is essentially equivalent to the lack of {it comparison principle}. We shall propose three approaches aiming at reviving the DPP in this setting: the duality approach, the dynamic utility approach, and the master equation approach. Unlike the game approach in many existing works in continuous time models, all our approaches produce the same value as the original static problem.
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Cited in
(29)- Robust time-inconsistent stochastic control problems
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