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Deciding with judgment

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  • Manganelli, Simone

Abstract

Non sample information is hidden in frequentist statistics in the choice of the hypothesis to be tested and of the confidence level. Explicit treatment of these elements provides the connection between Bayesian and frequentist statistics. A frequentist decision maker starts from a judgmental decision and moves to the closest boundary of the confidence interval of the first order conditions, for a given loss function. This statistical decision rule does not perform worse than the judgmental decision with a probability equal to the confidence level. For any given prior, there is a mapping from the sample realization to the confidence level which makes Bayesian and frequentist decision rules equivalent. Frequentist decision rules can be interpreted as decisions under ambiguity. JEL Classification: C1, C11, C12, C13, D81

Suggested Citation

  • Manganelli, Simone, 2016. "Deciding with judgment," Working Paper Series 1947, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20161947
    Note: 196912
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    References listed on IDEAS

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    More about this item

    Keywords

    portfolio selection; statistical decision theory; statistical risk aversion;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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