This paper provides a simulation-based approach to optimal portfolio selection. We take a Bayesian approach as it naturally accounts for estimation risk, i.e., parameter uncertainty, learning of state variables and models, and can incorporate prior beliefs about future return distributions. We specifically highlight two implementations with great potential in portfolio selection. First, for com...

Most economic models make use of extreme rationality hypotheses: firms maximize profits with full knowledge of their technology and prices, and, investors are subjective expected utility maximizers whose beliefs are correct. Surely, some firms and some investors do not always behave as these models hypothesize. But does this matter for predictions of market outcomes? It could be that the aggreg...

A subjective expected utility agent is given information about the state of the world in the form of a set of possible priors. She is allowed to condition her prior on this information. A set of priors may be updated according to Bayes’ rule, prior-by-prior, upon learning that some state of the world has not obtained. We show that there exists no decision maker who obeys Bayes’ rule, conditions...

tic knowledge to aid decision-making has been studied Planners have traditionally not handled domain uncertainty, postponing that poesib’xlity to error monitoring routines during the execution of the plan. In real-world domains with incomplete knowledge, this results in inevitable delays d’-e to rep]annlug. This paper describes a planner that considers the rellabflity of the agent’s actions (le...

Table soccer (also called “foosball”) is much simpler than real soccer. Nevertheless, one faces the same challenges as in all other robotics domains. Sensors are noisy, actions must be selected under time pressure and the execution of actions is often less than perfect. One approach to solve the action selection problem in such a context is decision-theoretic planning, i.e., identifying the act...

We solve the principal-agent problem of a monopolist insurer selling to an agent whose riskiness (chance of a loss) is private information, a problem introduced in Stiglitz (1977)’s seminal paper. We prove several properties of optimal menus: the highest type gets full coverage (efficiency at the top), all other types are underinsured (downward distortions elsewhere), the contract is nonnegativ...

We study how present and future adverse selection costs affect the prices of assets that may be traded repeatedly. We find that adverse selection is not a trading cost on average, and therefore future trading “costs” have no direct impact on current prices. Adverse selection can lead to allocation inefficiencies, which influence prices. Specifically, prices are reduced by the present value of a...

Screening models are used to analyze contracting in many subfields of economics like regulation, labor economics, monopoly pricing, taxation or finance. Most models assume single crossing. This simplifies the analysis as local incentive compatibility is in this case sufficient for global incentive compatibility. If single crossing is violated, global incentive compatibility constraints have to ...

This paper reexamines the relationship between financial market imperfections and economic instability. I present a model in which financial accelerator effects come from adverse selection in credit markets. Unlike other models of the financial accelerator, the model I present has the potential to stabilize the economy rather than destabilize it. The stabilizing forces in the dynamic model are ...