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Deciding with Judgment

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  • Simone Manganelli

Abstract

A decision maker starts from a judgmental decision and moves to the closest boundary of the confidence interval. This statistical decision rule is admissible and does not perform worse than the judgmental decision with a probability equal to the confidence level, which is interpreted as a coefficient of statistical risk aversion. The confidence level is related to the decision maker's aversion to uncertainty and can be elicited with laboratory experiments using urns a la Ellsberg. The decision rule is applied to a problem of asset allocation for an investor whose judgmental decision is to keep all her wealth in cash.

Suggested Citation

  • Simone Manganelli, 2019. "Deciding with Judgment," Papers 1903.06980, arXiv.org.
  • Handle: RePEc:arx:papers:1903.06980
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    References listed on IDEAS

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    1. Charles F. Manski, 2013. "Response to the Review of ‘Public Policy in an Uncertain World’," Economic Journal, Royal Economic Society, vol. 0, pages 412-415, August.
    2. Granger, C. W. J. & Newbold, Paul, 1986. "Forecasting Economic Time Series," Elsevier Monographs, Elsevier, edition 2, number 9780122951831 edited by Shell, Karl.
    3. Chamberlain, Gary, 2000. "Econometrics and decision theory," Journal of Econometrics, Elsevier, vol. 95(2), pages 255-283, April.
    4. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    5. Victor DeMiguel & Lorenzo Garlappi & Raman Uppal, 2009. "Optimal Versus Naive Diversification: How Inefficient is the 1-N Portfolio Strategy?," Review of Financial Studies, Society for Financial Studies, vol. 22(5), pages 1915-1953, May.
    6. Jan R. Magnus, 2002. "Estimation of the mean of a univariate normal distribution with known variance," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 225-236, June.
    7. Danilov, D.L. & Magnus, J.R., 2002. "Estimation of the Mean of a Univariate Normal Distribution When the Variance is not Known," Discussion Paper 2002-77, Tilburg University, Center for Economic Research.
    8. repec:taf:jnlbes:v:30:y:2012:i:1:p:1-17 is not listed on IDEAS
    9. Manski, Charles F., 2013. "Public Policy in an Uncertain World: Analysis and Decisions," Economics Books, Harvard University Press, number 9780674066892, December.
    10. Manganelli, Simone, 2009. "Forecasting With Judgment," Journal of Business & Economic Statistics, American Statistical Association, vol. 27(4), pages 553-563.
    11. Daniel Ellsberg, 1961. "Risk, Ambiguity, and the Savage Axioms," The Quarterly Journal of Economics, Oxford University Press, vol. 75(4), pages 643-669.
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    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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