Entropy Coherent and Entropy Convex Measures of Risk - Eurandom
Entropy Coherent and Entropy Convex Measures of Risk - Eurandom Entropy Coherent and Entropy Convex Measures of Risk - Eurandom
Variational Preferences ◮ A rich paradigm for decision-making under ambiguity is the theory of variational preferences (Maccheroni, Marinacci and Rustichini, 2006). ◮ An economic agent evaluates the payoff of a choice alternative (financial position) X according to U(X) = inf Q∈Q {EQ [u(X)] + α(Q)}, where u : R → R is an increasing function, Q is a set of probability measures and α is an ambiguity index defined on Q. Entropy Coherent and Entropy Convex Measures of Risk Advances in Financial Mathematics, Eurandom, Eindhoven 4/40
Multiple Priors Preferences ◮ A special case of interest is that of multiple priors preferences (Gilboa and Schmeidler, 1989), obtained by considering U(X) = inf Q∈Q¨EQ [u(X)] + ĪM(Q)©, where ĪM is the ambiguity index that is zero if Q ∈ M and ∞ otherwise. ◮ Gilboa and Schmeidler (1989) and Maccheroni, Marinacci and Rustichini (2006) established preference axiomatizations of these theories, generalizing Savage (1954) in the framework of Anscombe and Aumann (1963). ◮ The representation of Gilboa and Schmeidler (1989), also referred to as maxmin expected utility, was a decision-theoretic foundation of the classical decision rule of Wald (1950) — see also Huber (1981) — that had long seen little popularity outside (robust) statistics. Entropy Coherent and Entropy Convex Measures of Risk Advances in Financial Mathematics, Eurandom, Eindhoven 5/40
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- Page 3: Convex Measures of Risk ◮ Convex
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- Page 11 and 12: Question Rephrased [1] ◮ In other
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Multiple Priors Preferences<br />
◮ A special case <strong>of</strong> interest is that <strong>of</strong> multiple priors preferences (Gilboa <strong>and</strong><br />
Schmeidler, 1989), obtained by considering<br />
U(X) = inf<br />
Q∈Q¨EQ [u(X)] + ĪM(Q)©,<br />
where ĪM is the ambiguity index that is zero if Q ∈ M <strong>and</strong> ∞ otherwise.<br />
◮ Gilboa <strong>and</strong> Schmeidler (1989) <strong>and</strong> Maccheroni, Marinacci <strong>and</strong> Rustichini<br />
(2006) established preference axiomatizations <strong>of</strong> these theories,<br />
generalizing Savage (1954) in the framework <strong>of</strong> Anscombe <strong>and</strong> Aumann<br />
(1963).<br />
◮ The representation <strong>of</strong> Gilboa <strong>and</strong> Schmeidler (1989), also referred to as<br />
maxmin expected utility, was a decision-theoretic foundation <strong>of</strong> the<br />
classical decision rule <strong>of</strong> Wald (1950) — see also Huber (1981) — that<br />
had long seen little popularity outside (robust) statistics.<br />
<strong>Entropy</strong> <strong>Coherent</strong> <strong>and</strong> <strong>Entropy</strong> <strong>Convex</strong> <strong>Measures</strong> <strong>of</strong> <strong>Risk</strong> Advances in Financial Mathematics, Eur<strong>and</strong>om, Eindhoven 5/40