Precautionary principle as a rule of choice with optimism on windfall gains and pessimism on catastrophic losses

2013

Cent Eur J Oper Res

The Hurwicz's criterion is one of the classical decision rules applied in decision making under uncertainty as a tool enabling to find an optimal pure strategy both for interval and scenarios uncertainty. The interval uncertainty occurs when the decision maker knows the range of payoffs for each alternative and all values belonging to this interval are theoretically probable (the distribution of payoffs is continuous). The scenarios uncertainty takes place when the result of a decision depends on the state of nature that will finally occur and the number of possible states of nature is known and limited (the distribution of payoffs is discrete). In some specific cases the use of the Hurwicz's criterion in the scenarios uncertainty may lead to quite illogical and unexpected results. Therefore, the author presents two new procedures combining the Hurwicz's pessimism-optimism index with the Laplace's approach and using an additional parameter allowing to set an appropriate width for the ranges of relatively good and bad payoffs related to a given decision. The author demonstrates both methods on the basis of an example concerning the choice of an investment project. The methods described may be used in each decision making process within which each alternative (decision, strategy) is characterized by only one criterion (or one synthetic measure).

Section: Introductionmentioning

confidence: 99%

Modifications of the Hurwicz’s decision rule

2013

Cent Eur J Oper Res

“…The literature also offers various extensions or hybrids of those methods, see e.g. [2,3,4,7,8,9,10,11,12,13,15,16,17,18,19,20,27,36,41,46,53]. Nevertheless, the majority of the extended rules refer to the probability calculus (for instance, expected profit maximization, expected utility maximization, subjective expected utility, maximin expected utility, α-maximin expected utility, restricted Bayes/Hurwicz, prospect theory, cumulative prospect theory, Choquet expected utility), which is rather characteristic of DMUR.…”

Section: Decision Making Under Uncertainty With Scenario Planningmentioning

confidence: 99%

Modifications of the Omega ratio for decision making under uncertainty

2015

Croat. Oper. Res. Rev.

Abstract. The Omega ratio (Ω-ratio) was proposed by Shadwick and Keating in 2002 as a performance measure applied to rankings of assets, portfolios or funds. It involves partitioning returns into loss and gain below and above a given threshold. The original version was designed for decision making under risk (probabilities completely known), but recent research has shown that this measure can be adapted to decision making under partial information (likelihood known incompletely). Our contribution will be to use the concept of the Omega ratio in decision making under uncertainty (DMUU) which occurs when the decision maker (DM) chooses the appropriate alternative on the basis of certain scenarios for which probabilities are not known at all. The goal of this article is to adjust the Ω-ratio to DMUU so that it takes into consideration the DM's attitude towards risk and the distribution of all payoffs connected with particular decisions. The Ω-ratio is combined with a hybrid of Hurwicz and Bayes rules proposed by the author in another paper. The significant advantage of the new measure, Ω(H+B)ratio, is the possibility to compare alternatives (strategies, projects) when the likelihood of particular scenarios is not known or when the DM does not intend to use the available data.

“…The literature also offers many diverse extensions or hybrids of those methods, e.g. (Basili 2006;Basili et al 2008;Basili, Chateauneuf 2011;Ellsberg 2001;Etner et al 2012;Gaspars 2007;Gaspars-Wieloch 2012, 2014a, 2014c, 2014d, 2014e, 2015Ghirardato et al 2004;Gilboa 2009;Gilboa, Schmeidler 1989;Marinacci 2002;Piasecki 1990;Schmeidler 1986;Tversky, Kahneman 1992). Nevertheless, the majority of the extended rules refer to the probability calculus (for instance expected utility maximization, maximin expected utility, α-maximin expected utility, restricted Bayes/Hurwicz, prospect theory, cumulative prospect theory, Choquet expected utility), which is rather characteristic of DMR (or DMU with probabilities).…”

Section: Decision Making Under Uncertainty With Scenariosmentioning

confidence: 99%

The Use of a Modification of the Hurwicz’s Decision Rule in Multicriteria Decision Making Under Complete Uncertainty

Business, Management and Education

2014

The paper concerns multicriteria decision making under uncertainty with scenario planning. This topic is explored by many researchers because almost all real-world decision problems have multiple conflicting criteria and a deterministic criteria evaluation is often impossible (e.g. mergers and acquisitions, new product development). We propose two procedures for uncertain multi-objective optimization (for dependent and independent criteria matrices) which are based on the SAPO method – a modification of the Hurwicz’s rule for one-criterion problems, recently presented in another paper. The new approaches take into account the decision maker’s preference structure and attitude towards risk. It considers the frequency and the level of extreme evaluations and generates logic rankings for symmetric and asymmetric distributions. The application of the suggested tool is illustrated with an example of marketing strategies selection.