Risk Aversion in Inventory Management
Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi...
| Main Authors: | , , , |
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| Format: | Article |
| Language: | English |
| Published: |
2004
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| Subjects: | |
| Online Access: | http://hdl.handle.net/1721.1/7465 |
| _version_ | 1811094501338382336 |
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| author | Chen, Xin Sim, Melvyn Simchi-Levi, David Sun, Peng |
| author_facet | Chen, Xin Sim, Melvyn Simchi-Levi, David Sun, Peng |
| author_sort | Chen, Xin |
| collection | MIT |
| description | Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution. |
| first_indexed | 2024-09-23T16:01:19Z |
| format | Article |
| id | mit-1721.1/7465 |
| institution | Massachusetts Institute of Technology |
| language | English |
| last_indexed | 2024-09-23T16:01:19Z |
| publishDate | 2004 |
| record_format | dspace |
| spelling | mit-1721.1/74652019-04-11T02:45:30Z Risk Aversion in Inventory Management Chen, Xin Sim, Melvyn Simchi-Levi, David Sun, Peng risk aversion inventory models risk assessment risk measurement pricing strategies policy decisions Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution. Singapore-MIT Alliance (SMA) 2004-12-14T21:00:58Z 2004-12-14T21:00:58Z 2005-01 Article http://hdl.handle.net/1721.1/7465 en Innovation in Manufacturing Systems and Technology (IMST); 16292 bytes application/pdf application/pdf |
| spellingShingle | risk aversion inventory models risk assessment risk measurement pricing strategies policy decisions Chen, Xin Sim, Melvyn Simchi-Levi, David Sun, Peng Risk Aversion in Inventory Management |
| title | Risk Aversion in Inventory Management |
| title_full | Risk Aversion in Inventory Management |
| title_fullStr | Risk Aversion in Inventory Management |
| title_full_unstemmed | Risk Aversion in Inventory Management |
| title_short | Risk Aversion in Inventory Management |
| title_sort | risk aversion in inventory management |
| topic | risk aversion inventory models risk assessment risk measurement pricing strategies policy decisions |
| url | http://hdl.handle.net/1721.1/7465 |
| work_keys_str_mv | AT chenxin riskaversionininventorymanagement AT simmelvyn riskaversionininventorymanagement AT simchilevidavid riskaversionininventorymanagement AT sunpeng riskaversionininventorymanagement |