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Decision Making Under Uncertainty When Preference Information Is Incomplete

Benjamin Armbruster () and Erick Delage ()
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Benjamin Armbruster: Department of Industrial Engineering and Management Sciences, Northwestern University, Evanston, Illinois 60208
Erick Delage: Department of Decision Sciences, HEC Montréal, Montréal, Québec H3T 2A7, Canada

Management Science, 2015, vol. 61, issue 1, 111-128

Abstract: We consider the problem of optimal decision making under uncertainty but assume that the decision maker’s utility function is not completely known. Instead, we consider all the utilities that meet some criteria, such as preferring certain lotteries over other lotteries and being risk averse, S-shaped, or prudent. These criteria extend the ones used in the first- and second-order stochastic dominance framework. We then give tractable formulations for such decision-making problems. We formulate them as robust utility maximization problems, as optimization problems with stochastic dominance constraints, and as robust certainty equivalent maximization problems. We use a portfolio allocation problem to illustrate our results. This paper was accepted by Dimitris Bertsimas, optimization.

Keywords: expected utility; robust optimization; stochastic dominance; certainty equivalent (search for similar items in EconPapers)
Date: 2015
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