Recursive Preferences and Ambiguity Attitudes

We illustrate the strong implications of recursivity, a standard assumption in dynamic environments, on attitudes toward uncertainty. We show that in intertemporal consumption choice problems, recursivity always implies constant absolute ambiguity aversion (CAAA) when applying the standard dynamic extension of monotonicity. Our analysis yields a functional equation called “generalized rectangularity”, as it generalizes the standard notion of rectangularity for recursive multiple priors. Our results highlight that if uncertainty aversion is modeled as a formof convexity, recursivity limits us to recursive variational preferences. We propose a novel notion of monotonicity that enables us to overcome this limitation