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Statistical decision functions with judgment

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  • Manganelli, Simone

Abstract

A decision maker tests whether the gradient of the loss function evaluated at a judgmental decision is zero. If the test does not reject, the action is the judgmental decision. If the test rejects, the action sets the gradient equal to the boundary of the rejection region. This statistical decision rule is admissible and conditions on the sample realization. The confidence level reflects the decision maker’s aversion to statistical uncertainty. The decision rule is applied to a problem of asset allocation. JEL Classification: C1, C11, C12, C13, D81

Suggested Citation

  • Manganelli, Simone, 2021. "Statistical decision functions with judgment," Working Paper Series 2512, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:20212512
    Note: 196912
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecb.wp2512~b03b48b458.en.pdf
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    References listed on IDEAS

    as
    1. Granger, Clive W.J. & Machina, Mark J., 2006. "Forecasting and Decision Theory," Handbook of Economic Forecasting, in: G. Elliott & C. Granger & A. Timmermann (ed.), Handbook of Economic Forecasting, edition 1, volume 1, chapter 2, pages 81-98, Elsevier.
    2. Charles F. Manski, 2013. "Response to the Review of ‘Public Policy in an Uncertain World’," Economic Journal, Royal Economic Society, vol. 0, pages 412-415, August.
    3. Larry G. Epstein & Martin Schneider, 2010. "Ambiguity and Asset Markets," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 315-346, December.
    4. Chamberlain, Gary, 2000. "Econometrics and decision theory," Journal of Econometrics, Elsevier, vol. 95(2), pages 255-283, April.
    5. Andrew Patton & Allan Timmermann, 2012. "Forecast Rationality Tests Based on Multi-Horizon Bounds," Journal of Business & Economic Statistics, Taylor & Francis Journals, vol. 30(1), pages 1-17.
    6. Manski, Charles F., 2013. "Public Policy in an Uncertain World: Analysis and Decisions," Economics Books, Harvard University Press, number 9780674066892, Spring.
    7. Paolo Gelain & Simone Manganelli, 2020. "Monetary Policy with Judgment," Working Papers 20-14, Federal Reserve Bank of Cleveland.
    8. G. Elliott & C. Granger & A. Timmermann (ed.), 2006. "Handbook of Economic Forecasting," Handbook of Economic Forecasting, Elsevier, edition 1, volume 1, number 1.
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    Cited by:

    1. Manganelli, Simone, 2023. "Double conditioning: the hidden connection between Bayesian and classical statistics," Working Paper Series 2786, European Central Bank.

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    More about this item

    Keywords

    conditional inference.; confidence intervals; hypothesis testing; statistical decision theory;
    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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