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Location choice and risk attitude of a decision maker

Oded Berman, Nima Sanajian and Jiamin Wang

Omega, 2017, vol. 66, issue PA, 170-181

Abstract: In this paper we study the effect of a decision maker׳s risk attitude on the median and center problems, two well-known location problems, with uncertain demand in the mean–variance framework. We provide a mathematical programming formulation for both problems in the form of quadratic programming and develop solution procedures. In particular, we consider the vertex and absolute median problems separately, and identify a dominant set for the center problem. Glover׳s linearization method is applied to solve the vertex median problem. We also develop a branch and bound algorithm and a heuristic as the linearization technique takes too long for the vertex median problem on large networks. A computational experiment is conducted to compare the performance of the algorithms. We demonstrate the importance of taking into account the volatility and correlation structure when a location decision is made. The closest assignment property is also discussed for these location problems under the mean–variance objective.

Keywords: Facility location; Mixed-integer quadratic programming; Quadratic assignment problem; Mean–variance; Risk-averse; Risk-seeking (search for similar items in EconPapers)
Date: 2017
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Handle: RePEc:eee:jomega:v:66:y:2017:i:pa:p:170-181