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Optimal investment and the ambiguous aggregation of expert opinions

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  • Stergios Athanassoglou
  • Valentina Bosetti
  • Gauthier de Maere d'Aertryckey

Abstract

How should a decision-maker assess the potential of an investment when a group of experts provides strongly divergent estimates on its expected payoff? To address this question, we propose and analyze a variant of the well-studied -maxmin model in decision theory. In our framework, and consistent to the paper's empirical focus on R&D investment, experts' subjective probability distributions are allowed to be action-dependent. In addition, the decision maker constrains the sets of priors to be considered in accordance with ethical considerations and/or operational protocols. Using tools from convex and conic optimization, we are able to establish a number of analytical results including a closed-form expression of our model's value function, a thorough investigation of its differentiability properties, and necessary conditions for optimal investment. We apply our framework to original data from a recent expert elicitation survey on solar technology. The analysis suggests that more aggressive investment in solar technology R&D is likely to yield significant dividends even, or rather especially, after taking ambiguity into account. Keywords: expert aggregation; ambiguity; -maxmin; second-order cone programming; renewable energy R&D

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Bibliographic Info

Paper provided by IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University in its series Working Papers with number 468.

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Date of creation: 2012
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Handle: RePEc:igi:igierp:468

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  1. Jurgen Eichberger & Simon Grant & David Kelsey & Gleb A. Koshevoy, 2009. "The a-MEU Model: A Comment," Discussion Papers 0903, Exeter University, Department of Economics.
  2. Chateauneuf, Alain & Eichberger, Jurgen & Grant, Simon, 2007. "Choice under uncertainty with the best and worst in mind: Neo-additive capacities," Journal of Economic Theory, Elsevier, vol. 137(1), pages 538-567, November.
  3. Popp, David, 2004. "ENTICE: endogenous technological change in the DICE model of global warming," Journal of Environmental Economics and Management, Elsevier, vol. 48(1), pages 742-768, July.
  4. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
  5. Wojciech Olszewski, 2007. "Preferences Over Sets of Lotteries -super-1," Review of Economic Studies, Oxford University Press, vol. 74(2), pages 567-595.
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