IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

A Model of Anticipated Regret and Endogenous Beliefs

Registered author(s):

    This paper clarifies and extends the model of anticipated regret and endogenous beliefs based on the Savage (1951) Minmax Regret Criterion developped in Suryanarayanan (2006a). A decision maker chooses an action with state contingent consequences but cannot precisely assess the true probability distribution of the state. She distrusts her prior about the true distribution and surrounds it with a set of alternative but plausible probability distributions. The decision maker minimizes the worst expected regret over all plausible probability distributions and alternative actions, where regret is the loss experienced when the decision maker compares an action to a counterfactual feasible alternative for a given realization of the state. Preliminary theoretical results provide a systematic algorithm to find the solution to the decision problem and show how models of Minmax Regret differs from models of ambiguity aversion and expected utility. In particular, the solution to the decision problem can always be represented as a saddle point solution to an equivalent zerosum game problem. This new problem jointly produces the solution to the Anticipated Regret problem and the endogenous belief. We then use the endogenous belief to define the implicit certainty equivalent and to build an infinite horizon and time consistent problem for a decision maker minimizing her lifetime worst expected regrets.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.csef.it/WP/wp161.pdf
    Download Restriction: no

    Paper provided by Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy in its series CSEF Working Papers with number 161.

    as
    in new window

    Length:
    Date of creation: 01 Sep 2006
    Date of revision: 01 Dec 2008
    Handle: RePEc:sef:csefwp:161
    Contact details of provider: Postal: I-80126 Napoli
    Phone: +39 081 - 675372
    Fax: +39 081 - 675372
    Web page: http://www.csef.it/Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Kreps, David M & Porteus, Evan L, 1978. "Temporal Resolution of Uncertainty and Dynamic Choice Theory," Econometrica, Econometric Society, vol. 46(1), pages 185-200, January.
    2. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
    3. Bryan Routledge & Stanley Zin, 2009. "Model Uncertainty and Liquidity," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 543-566, October.
    4. Sawa, Takamitsu & Hiromatsu, Takeshi, 1973. "Minimax Regret Significance Points for a Preliminary Test in Regression Analysis," Econometrica, Econometric Society, vol. 41(6), pages 1093-1101, November.
    5. Bryan R. Routledge & Stanley E. Zin, 2010. "Generalized Disappointment Aversion and Asset Prices," Journal of Finance, American Finance Association, vol. 65(4), pages 1303-1332, 08.
    6. Charles F. Manski, 2004. "Statistical Treatment Rules for Heterogeneous Populations," Econometrica, Econometric Society, vol. 72(4), pages 1221-1246, 07.
    7. Cogley, Timothy & Sargent, Thomas J., 2008. "The market price of risk and the equity premium: A legacy of the Great Depression?," Journal of Monetary Economics, Elsevier, vol. 55(3), pages 454-476, April.
    8. Hansen, Lars Peter & Sargent, Thomas J & Tallarini, Thomas D, Jr, 1999. "Robust Permanent Income and Pricing," Review of Economic Studies, Wiley Blackwell, vol. 66(4), pages 873-907, October.
    9. Manski, Charles F., 2007. "Minimax-regret treatment choice with missing outcome data," Journal of Econometrics, Elsevier, vol. 139(1), pages 105-115, July.
    10. Epstein, Larry G & Wang, Tan, 1994. "Intertemporal Asset Pricing Under Knightian Uncertainty," Econometrica, Econometric Society, vol. 62(2), pages 283-322, March.
    11. Uzi Segal & Avia Spivak, 1988. "First Order Versus Second Order Risk Aversion," UCLA Economics Working Papers 540, UCLA Department of Economics.
    12. Loomes, Graham & Sugden, Robert, 1982. "Regret Theory: An Alternative Theory of Rational Choice under Uncertainty," Economic Journal, Royal Economic Society, vol. 92(368), pages 805-24, December.
    13. Larry G. Epstein & Martin Schneider, 2001. "Recursive Multiple-Priors," RCER Working Papers 485, University of Rochester - Center for Economic Research (RCER).
    14. Rustichini, Aldo, 1999. "Minimizing Regret: The General Case," Games and Economic Behavior, Elsevier, vol. 29(1-2), pages 224-243, October.
    15. Fishburn, P. C., 1984. "Dominance in SSB utility theory," Journal of Economic Theory, Elsevier, vol. 34(1), pages 130-148, October.
    16. Epstein, Larry G. & Zin, Stanley E., 1990. "'First-order' risk aversion and the equity premium puzzle," Journal of Monetary Economics, Elsevier, vol. 26(3), pages 387-407, December.
    17. Hansen, Lars Peter & Sargent, Thomas J., 2005. "Recursive robust estimation and control without commitment," Discussion Paper Series 1: Economic Studies 2005,28, Deutsche Bundesbank, Research Centre.
    18. Gilboa, Itzhak & Schmeidler, David, 1989. "Maxmin expected utility with non-unique prior," Journal of Mathematical Economics, Elsevier, vol. 18(2), pages 141-153, April.
    19. Lars Peter Hansen & Thomas J. Sargent, 2005. "Certainty equivalence and model uncertainty," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 17-38.
    20. Dirk Bergemann & Karl Schlag, 2005. "Robust Monopoly Pricing: The Case of Regret," Economics Working Papers ECO2005/10, European University Institute.
    21. Andrea Gallice, 2006. "Predicting one Shot Play in 2x2 Games Using Beliefs Based on Minimax Regret," Working Papers 2006.31, Fondazione Eni Enrico Mattei.
    22. Dow, James & Werlang, Sergio Ribeiro da Costa, 1992. "Uncertainty Aversion, Risk Aversion, and the Optimal Choice of Portfolio," Econometrica, Econometric Society, vol. 60(1), pages 197-204, January.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:sef:csefwp:161. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Lia Ambrosio)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.