Land Allocation in the Presence of Estimation Risk
Estimation risk occurs when parameters relevant for decision making are uncertain. Bayes'Â’ criterion is consistent with expected-utility maximization in the presence of estimation risk. This article examines optimal (BayesÂ’') land allocations and land allocations obtained using the traditional plug-in approach and two alternative decision rules. BayesÂ’' allocations are much better economically than the other allocations when there are few sample observations relative to activities. Calculation of certainty equivalent returns (CERs) with estimation risk is also discussed and illustrated. CERs are typically (and incorrectly) calculated with the plug-in approach. Plug-in CERs may be extremely misleading.
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|Date of creation:||31 Jul 1995|
|Date of revision:|
|Publication status:||Published in Journal of Agricultural and Resource Economics, July 1995, vol. 20 no. 1, pp. 49-62|
|Contact details of provider:|| Postal: Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070|
Phone: +1 515.294.6741
Fax: +1 515.294.0221
Web page: http://www.econ.iastate.edu
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- Klein, Roger W, et al, 1978. "Decisions with Estimation Uncertainty," Econometrica, Econometric Society, vol. 46(6), pages 1363-87, November.
- Coles, Jeffrey L. & Loewenstein, Uri, 1988. "Equilibrium pricing and portfolio composition in the presence of uncertain parameters," Journal of Financial Economics, Elsevier, vol. 22(2), pages 279-303, December.
- Lence, Sergio H & Hayes, Dermot J, 1994.
" Parameter-Based Decision Making under Estimation Risk: An Application to Futures Trading,"
Journal of Finance,
American Finance Association, vol. 49(1), pages 345-57, March.
- Lence, Sergio H. & Hayes, Dermot J., 1994. "Parameter-Based Decision Making Under Estimation Risk: An Application to Futures Trading," Staff General Research Papers 693, Iowa State University, Department of Economics.
- Geweke, John, 1988. "Antithetic acceleration of Monte Carlo integration in Bayesian inference," Journal of Econometrics, Elsevier, vol. 38(1-2), pages 73-89.
- Chen, Son-Nan & Brown, Stephen J, 1983. " Estimation Risk and Simple Rules for Optimal Portfolio Selection," Journal of Finance, American Finance Association, vol. 38(4), pages 1087-93, September.
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