On the Relation between Robust and Bayesian Decision Making

CFS Working Paper No. 2003/02

On the Relation between Robust and
Bayesian Decision Making

Klaus Adam*

December 2002

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.

JEL Classification: D81

Keywords: robust decision theory, uncertainty aversion, risk aversion

*Klaus Adam, University of Frankfurt, Mertonstr.17, PF 94, 60054 Frankfurt, Germany, and Research Fellow at
the Center for Financial Studies, E-mail: [email protected]

Thanks go to Noah Williams for helpful comments. All errors are mine.

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