The Hurwicz decision rule’s relationship to decision making with the triangle and beta distributions and exponential utility

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Industrial and Manufacturing Systems Engineering
The Department of Industrial and Manufacturing Systems Engineering teaches the design, analysis, and improvement of the systems and processes in manufacturing, consulting, and service industries by application of the principles of engineering. The Department of General Engineering was formed in 1929. In 1956 its name changed to Department of Industrial Engineering. In 1989 its name changed to the Department of Industrial and Manufacturing Systems Engineering.
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Non-probabilistic approaches to decision making have been proposed for situations in which an individual does not have enough information to assess probabilities over an uncertainty. One non-probabilistic method is to use intervals in which an uncertainty has a minimum and maximum but nothing is assumed about the relative likelihood of any value within the interval. The Hurwicz decision rule in which a parameter trades off between pessimism and optimism generalizes the current rules for making decisions with intervals. This article analyzes the relationship between intervals based on the Hurwicz rule and traditional decision analysis using a few probability distributions and an exponential utility functions. This article shows that the Hurwicz decision rule for an interval is logically equivalent to: (i) an expected value decision with a triangle distribution over the interval; (ii) an expected value decision with a beta distribution; and (iii) an expected utility decision with constant absolute risk aversion with a uniform distribution. These probability distributions are not exhaustive. There are likely other distributions and utility functions for which equivalence with the Hurwicz decision rule can also be established. Since a frequent reason for the use intervals is that intervals assume less information than a probability distribution, the results in this article call into question whether decision making based on intervals really assumes less information than subjective expected utility decision making.

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This is a manuscript of an article accepted for publication in Decision Analysis (2018). Posted with permission.

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Mon Jan 01 00:00:00 UTC 2018
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