On the Relation Between Robust and Bayesian Decision Making

Posted: 18 Aug 2004

See all articles by Klaus Adam

Klaus Adam

University of Mannheim; European Central Bank (ECB) - Department of Research; Centre for Economic Policy Research (CEPR)

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 decisions are insensitive (robust) to the precise assignment of prior probabilities. This holds independent from whether the preference for robustness is global or restricted to local perturbations around some reference model.

Keywords: Robust decision theory, uncertainty aversion, risk aversion

JEL Classification: D81

Suggested Citation

Adam, Klaus, On the Relation Between Robust and Bayesian Decision Making. Available at SSRN: https://ssrn.com/abstract=577685

Klaus Adam (Contact Author)

University of Mannheim ( email )

Department of Economics
L7 ,3-5
Mannheim, 68131
Germany

HOME PAGE: http://adam.vwl.uni-mannheim.de/1528.0.html

European Central Bank (ECB) - Department of Research ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344 6597 (Phone)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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