Research / BFI Working Paper•May 23, 2022

Making Decisions under Model Misspecification

Simone Cerreia-Vioglioa, Lars Peter Hansen, Fabio Maccheronia, Massimo Marinacci

We use decision theory to confront uncertainty that is sufficiently broad to incorporate “models as approximations.” We presume the existence of a featured collection of what we call “structured models” that have explicit substantive motivations. The decision maker confronts uncertainty through the lens of these models, but also views these models as simplifications, and hence, as misspecified. We extend the max-min analysis under model ambiguity to incorporate the uncertainty induced by acknowledging that the models used in decision-making are simplified approximations. Formally, we provide an axiomatic rationale for a decision criterion that incorporates model misspecification concerns.

More Research From These Scholars

Journal Article • Nov 10, 2020

The Price of Macroeconomic Uncertainty with Tenuous Beliefs

Lars Peter Hansen, Thomas J. Sargent
Topics:  Fiscal Studies
BFI Working Paper • Mar 17, 2022

Asset Pricing under Smooth Ambiguity in Continuous Time

Lars Peter Hansen, Jianjun Miao
Topics:  Financial Markets
BFI Working Paper • Sep 21, 2021

Did the Paycheck Protection Program Hit the Target?

João Granja, Christos Makridis, Constantine Yannelis, Eric Zwick
Topics:  COVID-19