Making Decisions under Model Misspecification

Simone Cerreia-Vioglio, Lars Hansen, Fabio Maccheroni and Massimo Marinacci

No 668, Working Papers from IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University

Abstract: We use decision theory to confront uncertainty that is sufficiently broad to incorporate "models as approximations".We presume the existence of a featured collection of what we call "structured models" that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified. We extend min-max analysis under model ambiguity to incorporate the uncertainty induced by acknowledging that the models used in decision-making are simplified approximations. Formally, we provide an axiomatic rationale for a decision criterion that incorporates model misspecification concerns.

Date: 2020
New Economics Papers: this item is included in nep-mic
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Citations: View citations in EconPapers (6)

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Related works:
Working Paper: Making Decisions under Model Misspecification (2022)
Working Paper: Making Decisions under Model Misspecification (2020)
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