Rational updating at the crossroads

Abstract

In this paper we explore the absentminded driver problem using two different scenarios. In the first scenario we assume that the driver is capable of reasoning about his degree of absentmindedness before he hits the highway. This leads to a Savage-style model where the states are mutually exclusive and the act-state independence is in place. In the second we employ centred possibilities, by modelling the states (i.e. the events about which the driver is uncertain) as the possible final destinations indexed by a time period. The optimal probability we find for continuing at an exit is different from almost all papers in the literature. In this scenario, act-state independence is still violated, but states are mutually exclusive and the driver arrives at his optimal choice probability via Bayesian updating. We show that our solution is the only one guaranteeing immunity from sure loss via a Dutch strategy, and that – despite initial appearances – it is time consistent. This raises important implications for the rationality of commitment in such scenarios.