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On the Relation between Robust and Bayesian Decision Making

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Abstract

This paper compares Bayesian decision theory with robust decision theory where the decision maker optimizes with respect to the worst state realization. For a class of robust decision problems there exists a sequence of Bayesian decision problems whose solution converges towards the robust solution. It is shown that the limiting Bayesian problem displays infinite risk aversion and that its solution is insensitive (robust) to the precise assignment of prior probabilities. Moreover, the limiting Bayesian objective turns out not to be time separable even if the objective function of the robust decision makers displays time separability.

Suggested Citation

  • Klaus Adam, 2001. "On the Relation between Robust and Bayesian Decision Making," CSEF Working Papers 68, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    • Handle: RePEc:sef:csefwp:68
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    Cited by:

    1. Renaud, J. & Thibault, J. & Lanouette, R. & Kiss, L.N. & Zaras, K. & Fonteix, C., 2007. "Comparison of two multicriteria decision aid methods: Net Flow and Rough Set Methods in a high yield pulping process," European Journal of Operational Research, Elsevier, vol. 177(3), pages 1418-1432, March.
    2. Robert Tetlow & Peter von zur Muehlen, 2004. "Avoiding Nash Inflation: Bayesian and Robus Responses to Model Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 7(4), pages 869-899, October.
    3. Keith Kuester & Volker Wieland, 2010. "Insurance Policies for Monetary Policy in the Euro Area," Journal of the European Economic Association, MIT Press, vol. 8(4), pages 872-912, June.
    4. Bigio, Saki, 2010. "Learning under fear of floating," Journal of Economic Dynamics and Control, Elsevier, vol. 34(10), pages 1923-1950, October.
    5. Rama Cont, 2006. "Model uncertainty and its impact on the pricing of derivative instruments," Post-Print halshs-00002695, HAL.
    6. Pauline Barrieu & Bernard Sinclair-Desgagné, 2009. "Economic Policy when Models Disagree," CIRANO Working Papers 2009s-03, CIRANO.
    7. Q. Farooq Akram & Yakov Ben-Haim & Øyvind Eitrheim, 2006. "Managing uncertainty through robust-satisficing monetary policy," Working Paper 2006/10, Norges Bank.

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    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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