Stochastically weighted stochastic dominance concepts with an application in capital budgeting

Hu, J; Homem-de-Mello, T; Mehrotra S.

Abstract

The problem of comparing random vectors arises in many applications. We propose three new concepts of stochastically weighted dominance for comparing random vectors X and Y. The main idea is to use a random vector V to scalarize X and Y as (VX)-X-T and (VY)-Y-T, and subsequently use available concepts from stochastic dominance and stochastic optimization for comparison. For the case where the distributions of X, Y and V have finite support, we give (mixed-integer) linear inequalities that can be used for random vector comparison as well as for modeling of optimization problems where one of the random vectors depends on decisions to be optimized. Some advantages of the proposed new concepts are illustrated with the help of a capital budgeting example. (C) 2013 Elsevier B.V. All rights reserved.

Más información

Título según WOS: Stochastically weighted stochastic dominance concepts with an application in capital budgeting
Título de la Revista: EUROPEAN JOURNAL OF OPERATIONAL RESEARCH
Volumen: 232
Número: 3
Editorial: Elsevier
Fecha de publicación: 2014
Página de inicio: 572
Página final: 583
Idioma: English
URL: http://linkinghub.elsevier.com/retrieve/pii/S037722171300653X
DOI:

10.1016/j.ejor.2013.08.007

Notas: ISI