Robust Decision Theory and Econometrics

Gary Chamberlain

Annual Review of Economics, 2020, vol. 12, issue 1, 239-271

Abstract: This review uses the empirical analysis of portfolio choice to illustrate econometric issues that arise in decision problems. Subjective expected utility (SEU) can provide normative guidance to an investor making a portfolio choice. The investor, however, may have doubts on the specification of the distribution and may seek a decision theory that is less sensitive to the specification. I consider three such theories: maxmin expected utility, variational preferences (including multiplier and divergence preferences and the associated constraint preferences), and smooth ambiguity preferences. I use a simple two-period model to illustrate their application. Normative empirical work on portfolio choice is mainly in the SEU framework, and bringing in ideas from robust decision theory may be fruitful.

Date: 2020
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DOI: 10.1146/annurev-economics-081919-042544

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