Maastricht researchers awarded TOP grant

29 March 2012

Maastricht full professors Peter Schotman, Franz Palm, Antoon Pelsser and Jean-Pierre Urbain were awarded a €750,000 NWO grant for their research project entitled “Model Uncertainty”. Models are an important aspect of economic and financial policymaking, but tend to be flawed. How can policymakers create more reliable models that address the limitations of the models themselves? This is one of the questions the researchers hope to answer.  

 

Many economic models are used to make the best possible decisions in a world of uncertainty. This is true of decisions made by policymakers on the macro level, as well as those used to describe the behaviour of individuals in our economy. An economic model is used to describe our uncertain world as follows: all possible future scenarios are identified and ascribed a probability score. This list of possible scenarios and probabilities is then used to weigh the impact of good and bad outcomes in order to reach the best possible decision.

 

Antoon Pelsser: “The Achilles heel of this approach is drafting the list of scenarios and probabilities. If we take the wrong scenarios into consideration or misjudge the probability of them occurring, our models will make an incorrect assessment, which could lead to the wrong decision. This is what we call ‘model uncertainty’.”

 

The research will primarily focus on financial investment and monetary policies. An important research question is to what extent model uncertainty among investors influences the price fluctuations of high-risk investments.

 

The TOP grant is intended for excellent researcher groups within the social and behavioural sciences. The grant offers them the opportunity to further strengthen their group with outstanding researchers.

 

Peter Schotman, Franz Palm, Antoon Pelsser and Jean-Pierre Urbain are affiliated with the Maastricht Research School of Economics of Technology and Organisations (METEOR) at Maastricht University.

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