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Robust Decision Making using a Risk-Averse Utility Set

Jian Hu(jianhu***at***northwestern.edu)
Sanjay Mehrotra(mehrotra***at***iems.northwestern.edu)

Abstract: Eliciting the utility of a decision maker is difficult. In this paper, we develop a flexible decision making framework, which uses the concept of utility robustness to address the problem of ambiguity and inconsistency in utility assessments. The ideas are developed by giving a probabilistic interpretation to utility and marginal utility functions. Boundary and additional conditions are used to describe a utility set that characterizes a decision maker's risk attitude. Reformulation and convergence results are given for the discrete and continuous specifications of the utility set. A portfolio investment decision problem is used to illustrate the basic ideas, and demonstrate the usefulness of the proposed decision making framework.

Keywords: Utility Function, Marginal Utility Function, Expected Utility Decision Making, Robust Optimization, Portfolio Optimization

Category 1: Applications -- OR and Management Sciences

Category 2: Robust Optimization

Category 3: Applications -- OR and Management Sciences (Finance and Economics )

Citation: Department of Industrial Engineering and Management Sciences, Northwestern University, 2012

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Entry Submitted: 03/29/2012
Entry Accepted: 03/29/2012
Entry Last Modified: 03/29/2012

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