Robust decision-making under risk and ambiguity

Maximilian Blesch and Philipp Eisenhauer

Papers from arXiv.org

Abstract: Economists often estimate economic models on data and use the point estimates as a stand-in for the truth when studying the model's implications for optimal decision-making. This practice ignores model ambiguity, exposes the decision problem to misspecification, and ultimately leads to post-decision disappointment. Using statistical decision theory, we develop a framework to explore, evaluate, and optimize robust decision rules that explicitly account for estimation uncertainty. We show how to operationalize our analysis by studying robust decisions in a stochastic dynamic investment model in which a decision-maker directly accounts for uncertainty in the model's transition dynamics.

Date: 2021-04, Revised 2021-10
New Economics Papers: this item is included in nep-rmg
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