Dynamic Decision-Making under Model Misspecification

In this study, I investigate the dynamic decision problem with a finite parameter space when the functional form of conditional expected rewards is misspecified. Traditional algorithms, such as Thompson Sampling, guarantee neither an O (e^-T) rate of posterior parameter concentration nor an O (T^-1) rate of average regret. However, under mild conditions, we can still achieve an exponential convergence rate of the parameter to a pseudo truth set, an extension of the pseudo truth parameter concept introduced by White (1982). I further characterize the necessary conditions for the convergence of the expected posterior within this pseudo-truth set. Simulations demonstrate that while the maximum a posteriori (MAP) estimate of the parameters fails to converge under misspecification, the algorithm's average regret remains relatively robust compared to the correctly specified case. These findings suggest opportunities to design simple yet robust algorithms that achieve desirable outcomes even in the presence of model misspecifications.