Robust Decision-Making Under Risk and Ambiguity

Maximilian Blesch and Philipp Eisenhauer ()
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Maximilian Blesch: Berlin School of Economics
Philipp Eisenhauer: University of Bonn

No 104, ECONtribute Discussion Papers Series from University of Bonn and University of Cologne, Germany

Abstract: Economists often estimate a subset of their model parameters outside the model and let the decision-makers inside the model treat these point estimates as-if they are correct. This practice ignores model ambiguity, opens the door for misspecification of the decision problem, and leads to post-decision disappointment. We develop a framework to explore, evaluate, and optimize decision rules that explicitly account for the uncertainty in the first step estimation using statistical decision theory. We show how to operationalize our analysis by studying a stochastic dynamic investment model where the decision-makers take ambiguity about the model's transition dynamics directly into account.

Keywords: decision-making under uncertainty; robust Markov decision process (search for similar items in EconPapers)
JEL-codes: C44 D25 D81 (search for similar items in EconPapers)
Pages: 35 pages
Date: 2021-07
New Economics Papers: this item is included in nep-mic, nep-rmg and nep-upt
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https://www.econtribute.de/RePEc/ajk/ajkdps/ECONtribute_104_2021.pdf First version, 2021 (application/pdf)

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Persistent link: https://EconPapers.repec.org/RePEc:ajk:ajkdps:104

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