Robustness and Uncertainty AversionLars

This paper connects robust control theory to the max-min expected utility model of uncertainty aversion. Max-min expected utility theory depicts preferences using multiple prior distributions. Robust control theory regards a unique controlled stochastic process as an approximation by introducing a set of perturbations to it. We link the two approaches by interpreting the perturbations in robust control as the multiple priors of the max-min expected utility theory. We use a Brownian motion information structure. We construct recursive representations of preferences and of dynamic robust decision problems.