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Robust Decision Making using a General Utility Set

Jian Hu (jianhu***at***umich.edu)
Manish Bansal (manish.bansal***at***northwestern.edu)
Sanjay Mehortra (mehrotra***at***iems.northwestern.edu)

Abstract: We develop the concept of utility robustness to address the problem of ambiguity and inconsistency in utility assessments. A robust decision-making framework is built on a utility set which characterizes a decision maker's risk attitude described by boundary and auxiliary conditions. This framework is studied using the Sample Average Approximation (SAA) approach. We show the asymptomatic convergence and give a tractable mixed-integer reformulation of the SAA problem. An application of this framework is illustrated by a portfolio investment decision problem in financial markets.

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

Category 1: Robust Optimization

Category 2: Stochastic Programming

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

Citation: IEMS Dept., Northwestern University, 2012

Download: [PDF]

Entry Submitted: 07/06/2012
Entry Accepted: 07/06/2012
Entry Last Modified: 09/22/2015

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