ISSN:
1432-5217
Keywords:
Stochastic Optimization with Recourse
;
Decision-making under Uncertainty
;
Certainty Equivalents
;
Risk Aversion
;
Inventory Control
;
Insurance
Source:
Springer Online Journal Archives 1860-2000
Topics:
Mathematics
,
Economics
Notes:
Abstract A random variable (RV) X is given aminimum selling price (S) $$S_U \left( X \right): = \mathop {\sup }\limits_x \left\{ {x + EU\left( {X - x} \right)} \right\}$$ and amaximum buying price (B) $$B_p \left( X \right): = \mathop {\inf }\limits_x \left\{ {x + EP\left( {X - x} \right)} \right\}$$ whereU(·) andP(·) are appropriate functions. These prices are derived from considerations ofstochastic optimization with recourse, and are calledrecourse certainty equivalents (RCE's) of X. Both RCE's compute the “value” of a RV as an optimization problem, and both problems (S) and (B) have meaningful dual problems, stated in terms of theCsiszár φ-divergence $$I_\phi \left( {p,q} \right): = \sum\limits_{i = 1}^n {q_i \phi \left( {\frac{{p_i }}{{q_i }}} \right)} $$ a generalized entropy function, measuring the distance between RV's with probability vectors p and q. The RCES U was studied elsewhere, and applied to production, investment and insurance problems. Here we study the RCEB P, and apply it to problems ofinventory control (where the attitude towards risk determines the stock levels and order sizes) andoptimal insurance coverage, a problem stated as a game between the insurance company (setting the premiums) and the buyer of insurance, maximizing the RCE of his coverage.
Type of Medium:
Electronic Resource
URL:
http://dx.doi.org/10.1007/BF01199463
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