Scenario-based portfolio selection of investment projects with incomplete probability and utility information

Juuso Liesiö and Ahti Salo

European Journal of Operational Research, 2012, vol. 217, issue 1, 162-172

Abstract: In the selection of investment projects, it is important to account for exogenous uncertainties (such as macroeconomic developments) which may impact the performance of projects. These uncertainties can be addressed by examining how the projects perform across several scenarios; but it may be difficult to assign well-founded probabilities to such scenarios, or to characterize the decision makers’ risk preferences through a uniquely defined utility function. Motivated by these considerations, we develop a portfolio selection framework which (i) uses set inclusion to capture incomplete information about scenario probabilities and utility functions, (ii) identifies all the non-dominated project portfolios in view of this information, and (iii) offers decision support for rejection and selection of projects. The proposed framework enables interactive decision support processes where the implications of additional probability and utility information or further risk constraints are shown in terms of corresponding decision recommendations.

Keywords: Decision analysis; Project portfolio selection; Risk; Scenarios; Stochastic dominance; Incomplete information (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (35)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:217:y:2012:i:1:p:162-172

DOI: 10.1016/j.ejor.2011.08.025

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