Decision Making Under Model Uncertainty: Frechet-Wasserstein Mean Preferences

• 成果类型: Article
• 署名作者: Petracou, Electra V.; Xepapadeas, Anastasios; Yannacopoulos, Athanasios N.
• 署名单位: University of Aegean; Athens University of Economics & Business; University of Bologna; Athens University of Economics & Business; Athens University of Economics & Business
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2021.3961
• 发表日期: 2022
• 页码: 1195-1211
• 关键词: Ambiguity aversion; Frechet mean preferences; Wasserstein Metric; social discount rate; model uncertainty

摘要

This paper contributes to the literature on decision making under multiple probability models by studying a class of variational preferences. These preferences are defined in terms of Frechet mean utility functionals, which are based on the Wasserstein metric in the space of probabilitymodels. In order to produce ameasure that is the closest to all probability models in the given set, we find the barycenter of the set. We derive explicit expressions for the Frechet-Wasserstein mean utility functionals and show that they can be expressed in terms of an expansion that provides a tractable link between risk aversion and ambiguity aversion. The proposed utility functionals are illustrated in terms of two applications. The first application allows us to define the social discount rate under model uncertainty. In the second application, the functionals are used in risk securitization. The barycenter in this case can be interpreted as themodel thatmaximizes the probability that different decisionmakers will agree on, which could be useful for designing and pricing a catastrophe bond.