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| Risk Aversion in Inventory Management |
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| Abstract: |
Traditional inventory models focus on
risk-neutral decision makers, i.e., characterizing replen- ishment strategies
that maximize expected total pro¯t, 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. These structural results are extended to
models in which the decision maker has access to a (partially) complete
financial market and can hedge its operational risk through trading financial
securities. 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.
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| Keywords: |
risk aversion, inventory, structural optimal
policies, dynamic programming | |
View paper
(http://faculty.fuqua.duke.edu/%7Epsun/bio/riskaverseinventory.pdf)
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