Research Publication

August 2020 | Working Paper

Making Decisions Under Model Misspecification

Simone Cerreia-Vioglioa, Lars Peter Hansen, Fabio Maccheronia, and Massimo Marinacci

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 simpli…fications, and hence, as misspeci…fied. 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 misspeci…fication concerns.

Series Name: Becker Friedman Institute Working Paper Series |Tags: Uncertainty|