2020/12/30 by Lars Peter Hansen, Thomas J. Sargent · 38 citations
Decision Sciences · Economics, Econometrics and Finance · Mathematics · #Ambiguity #Artificial intelligence #Computer science #Consistency (knowledge bases) #Decision maker #Decision-Making and Behavioral Economics #Econometrics #Economic and Environmental Valuation #Economic theories and models #Entropy (arrow of time) #Finite set #Mathematical economics #Mathematics #Operations research #Set (abstract data type)
paper · doi:10.1016/j.jet.2020.105165
published in Journal of Economic Theory 199, 105165 (Elsevier BV)
openalex publication_date 2020/12/30 · openalex created_date 2025/10/10 · openalex updated_date 2026/08/01
A decision maker is averse to not knowing a prior over a set of restricted structured models (ambiguity) and suspects that each structured model is misspecified. The decision maker evaluates intertemporal plans under all of the structured models and, to recognize possible misspecifications, under unstructured alternatives that are statistically close to them. Likelihood ratio processes are used to represent unstructured alternative models, while relative entropy restricts a set of unstructured models. A set of structured models might be finite or indexed by a finite-dimensional vector of unknown parameters that could vary in unknown ways over time. We model such a decision maker with a dynamic version of variational preferences and revisit topics including dynamic consistency and admissibility.