Finding Common Ground When Experts Disagree: Robust Portfolio Decision Analysis

IEB Working Paper N. 2017/11

48 Pages Posted: 26 Dec 2017

See all articles by Erin Baker

Erin Baker

University of Massachusetts at Amherst - Mechanical and Industrial Engineering Department

Valentina Bosetti

Bocconi University; CMCC - Euro Mediterranean Centre for Climate Change

Ahti Salo

Aalto University - School of Science

Date Written: November 10, 2017

Abstract

We address the problem of decision making under “deep uncertainty,” introducing an approach we call Robust Portfolio Decision Analysis. We introduce the idea of Belief Dominance as a prescriptive operationalization of a concept that has appeared in the literature under a number of names. We use this concept to derive a set of non-dominated portfolios; and then identify robust individual alternatives from the non-dominated portfolios. The Belief Dominance concept allows us to synthesize multiple conflicting sources of information by uncovering the range of alternatives that are intelligent responses to the range of beliefs. This goes beyond solutions that are optimal for any specific set of beliefs to uncover defensible solutions that may not otherwise be revealed. We illustrate our approach using a problem in the climate change and energy policy context: choosing among clean energy technology R&D portfolios. We demonstrate how the Belief Dominance concept can uncover portfolios that would otherwise remain hidden and identify robust individual investments.

Keywords: Energy Technologies, R&D Investments, Expert Elicitations, Uncertainty

JEL Classification: O32, Q4, D80

Suggested Citation

Baker, Erin and Bosetti, Valentina and Salo, Ahti, Finding Common Ground When Experts Disagree: Robust Portfolio Decision Analysis (November 10, 2017). IEB Working Paper N. 2017/11, Available at SSRN: https://ssrn.com/abstract=3091113 or http://dx.doi.org/10.2139/ssrn.3091113

Erin Baker (Contact Author)

University of Massachusetts at Amherst - Mechanical and Industrial Engineering Department ( email )

Department of Operations and Information Managemen
Amherst, MA 01003
United States

Valentina Bosetti

Bocconi University

Via Gobbi 5
Milan, 20136
Italy

CMCC - Euro Mediterranean Centre for Climate Change

via Augusto Imperatore, 16
Lecce, I-73100
Italy

Ahti Salo

Aalto University - School of Science ( email )

Espoo
Finland

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