Making Decisions under Model Misspecification

69 Pages Posted: 3 Aug 2020 Last revised: 24 May 2022

See all articles by Simone Cerreia‐Vioglio

Simone Cerreia‐Vioglio

affiliation not provided to SSRN

Lars Peter Hansen

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER)

Fabio Maccheroni

Bocconi University - Department of Decision Sciences

Massimo Marinacci

Bocconi University - Department of Decision Sciences

Date Written: May 23, 2020

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 the max-min 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.

Keywords: caution, misspecification, statistical divergence, uncertainty

JEL Classification: C54, D81

Suggested Citation

Cerreia‐Vioglio, Simone and Hansen, Lars Peter and Maccheroni, Fabio and Marinacci, Massimo, Making Decisions under Model Misspecification (May 23, 2020). University of Chicago, Becker Friedman Institute for Economics Working Paper No. 2020-103, Available at SSRN: https://ssrn.com/abstract=3666424 or http://dx.doi.org/10.2139/ssrn.3666424

Simone Cerreia‐Vioglio

affiliation not provided to SSRN

No Address Available

Lars Peter Hansen (Contact Author)

University of Chicago - Department of Economics ( email )

1101 E 58th ST
Chicago, IL 60637
United States
773-702-8170 (Phone)
773-702-8490 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Fabio Maccheroni

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

Massimo Marinacci

Bocconi University - Department of Decision Sciences ( email )

Via Roentgen 1
Milan, 20136
Italy

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