Donald A. Wehrung

A portfolio of risk measures

A comprehensive set of sixteen measures of willingness to take risks has been developed. This set includes measures from three categories: measures from standardized risky situations having an underlying theory of risk, measures inferred from revealed choices in financial decisions, and measures derived from attitudes. A study of over 500 top-level business executives shows significant relationships within categories, but relatively little relationship across categories. Context differences, especially personal versus business situations and opportunities versus threats, underlie the responses.

Organizational Design and Management Norms: A Comparative Study of Managers' Perceptions in the People's Republic of China, Hong Kong, and Canada

This study surveys 155 executivesfrom the Peoples Republic of China (PRC), Hong Kong, and Canada to investigate whether norms for organizational design and management are subject to a process of globalization. The survey consisted of structured questionnaires using two different sets of Likert-like importance rating scales. One set of scales examined organizational design norms. The other setfocused on the desired attributes of a good manager The balance of the evidence from this study supports the hypothesis of globalization. However, the study also indicates that some norms of organizational design that reflect basic cultural values are resistant to change and convergence. Furthermore, the study indicates that regulatory and political differences may be reflected in local adaptation of organizational and management design norms.

Risk taking over gains and losses: a study of oil executives

This paper examines the risk propensities of experienced executives in the oil and gas industry faced with a hypothetical risky business decision that involves significant gains and losses. The executives were asked to provide the minimum price their firm should accept before selling their share of a joint exploration venture whose future prospects were systematically varied to include gains only, losses only, and mixed gains and losses. In addition, they were asked to provide a single probability equivalence for a mixed gain/loss situation in lieu of breaking even for sure. The executives were more risk taking than risk averse over pure losses, consistent with the prediction of prospect theory. Over pure gains, however, there was as much risk taking as risk aversion, with more risk taking occurring when the chance of breaking even was higher. The relationship between risk propensity over pure gains and over pure losses was insignificant, indicating very different attitudes in these two domains. Although the reflection effect did occur in some cases, it was not pervasive. There was a tendency for certainty equivalences to show greater risk taking than probability equivalences in mixed gain/loss situations, which was consistent with a reframing effect. Risk propensity over mixed gains and losses was closer to that expressed in the losses only domain than to risk propensity over pure gains. More than half of the executives gave responses that were fully consistent with expected utility, and an additional quarter of executives were consistent within a 10% margin of error in their responses. However, one out of five executives did not satisfy the stochastic dominance relationships among the certainty equivalences. Systematic inconsistencies occurred most frequently in the mixed situations where the certainty equivalences for some subjects were biased toward the outcome that had the predominant chance of occurring.

An Interactive Procedure for the School Boundary Problem with Declining Enrollment

School districts in some urban areas are facing reduced enrollments. Educational and economic considerations dictate closing schools. Parents, on the other hand, often resist closing neighborhood elementary schools and object to having children periodically reassigned. This paper presents an interactive procedure for establishing, under conditions of declining enrollment, boundaries that reflect educational, economic, and parental concerns. The procedure can incorporate a variety of administrative policies and requires inputs from administrators regarding characteristics of the district. The multi-period planning horizon is decomposed by year with coordination taking place through the use of restriction in a linear programming problem that forms the basis for reassignment of districts. The emphasis is not on optimization but rather on the achievement of a solution which satisfies the objectives of each group. Feasibility checks are designed to reduce the number of alternatives that must be considered in d...

Framework for the analysis of risks in forest management and silvicultural investments.

Abstract Determination of optimal forest-management regimes has been traditionally based on the assumption that the outcome of the management activity is certain. This was the case despite the almost universal recognition that forest-management outcomes are, in fact, uncertain. In this paper, a comprehensive conceptual framework for incorporating risk in forest-management and silviculture investment is developed. The framework distinguishes between decision problems which are structured and those which are unstructured. For the former, the framework focuses upon achieving a match between the decision-problem representation and the degree of knowledge of risk preferences, risk-preference structures and the nature of the risks. For unstructured decisions a new formulation based upon the concept of resilience is developed. The two framework are reconciled through a calculus of risks, benefits and resilience.

Interactive Identification and Optimization Using a Binary Preference Relation

This paper considers the problem in which a single decision maker must choose an element from a known nonempty choice set Y of multi-attributed elements when his preferences are uncertain. The preferences are uncertain in the sense that they are not explicitly available. The decision-makers preferences are assumed to take the form of a binary relation on Y. We present an algorithm that requires the identification of preferences during the search process. The convergence of the adopted algorithm to a best element in Y relative to whatever preferences obtain is proved under the assumption that the identification of preferences is costless. We show that the sufficient conditions for convergence of this algorithm are weaker than the sufficient conditions for convergence of the interactive algorithm for the multiple criteria problem developed by Geoffrion, Dyer, and Feinberg.

Assessing Risk Propensity

The most accepted theory of risk is based on utility theory, as developed by von Neumann-Morgenstern (1947), Arrow (1971), and others. If the decision maker obeys the utility axioms, he acts as if he maximizes expected utility. The proof of the expected utility theorem suggests how to construct the utility function that reflects his risk attitudes.

Adjusting risky situations: A theoretical framework and empirical test

Experienced executives frequently try to modify the risky situations they face in order to make them more favorable rather than simply choosing from among available decision options. This article investigates several types of risk adjustments such as trying to influence the situation through bargaining and spending resources, gathering information, developing new options, and consulting ones superiors. A theoretical framework is presented that characterizes different types of adjustments and relates them to variables such as perceived risk, perceived control, perceived responsibility, decisiveness, and risky choice. The framework is tested using experienced decision makers who respond to four simulated risky business decisions.

Multiple Criteria Dominance Models: An Empirical Study of Investment Preferences

When making choices from among alternative investment opportunities, investors may focus upon criteria such as expected rate of return, variance, probability of specific gains, probability of specific losses, and negative semivariance. We presented over 400 top-level business executives with nine personal investment opportunities and obtained their preference rankings for these ventures. This paper examines the extent to which their rankings can be explained by single or multiple criteria dominance models. In general, we find that with a single criterion model the mean is the criterion most focussed upon, but that more than eighty percent of the cases cannot be explained by any single criterion. Two criteria dominance models provide considerably better explanations especially when we include the probability of specific gains as one of the criteria. Models with more than two criteria do not provide better explanations.

Multidimensional Line Search Using a Binary Preference Relation

A number of interactive algorithms involving line searches have recently been suggested for use when the decision-makers preferences take the form of a binary relation rather than the standard criterion function. This study examines the extension of well-known line-search procedures based on a criterion function to binary representations for preference and briefly outlines why some procedures are not extendible. Extensions of uniform and golden section line-search procedures are examined in detail. Knowledge of these extensions should assist the user of interactive algorithms to select a line-search procedure that is appropriate for his needs.