Risk Neutrality Research Articles

Risk preferences of learning algorithms

Agents' learning from feedback shapes economic outcomes, and many economic decision-makers today employ learning algorithms to make consequential choices. This paper shows that a widely used learning algorithm—ε-Greedy—exhibits emergent risk aversion: it prefers actions with lower variance. When presented with actions of the same expectation, under a wide range of conditions, ε-Greedy chooses the lower-variance action with probability approaching one. This emergent preference can have wide-ranging consequences, ranging from concerns about fairness to homogenization, and holds transiently even when the riskier action has a strictly higher expected payoff. We discuss two methods to correct this bias. The first method requires the algorithm to reweight data as a function of how likely the actions is chosen. The second requires the algorithm to have optimistic estimates of actions for which it has not collected much data. We show that these corrections restore risk neutrality.

Preferences, risk neutrality and risk-sensitive MDPs

Preferences, risk neutrality and risk-sensitive MDPs

A risk‐averse strategy based on information gap decision theory for optimal placement of service transformers in distribution networks

AbstractIn distribution networks, among the planning problems, optimal placement of medium voltage to low voltage (MV/LV) transformers is a vital and challenging issue. Electrical load uncertainty is an important factor that affects the result of this planning problem. This paper investigates optimal allocation of service transformers with respect to the load uncertainty modelled by information gap decision theory (IGDT). For this aim, the planning problem is solved in risk‐neutral (RN) and risk‐averse (RA) frameworks. In RN strategy, objective function is defined to minimize the cost of service transformers and low voltage feeders as well as the cost of power losses. On the other hand, in RA strategy, objective function is defined to maximize the radius of the uncertainty in such a way that any deviation of the uncertain parameter results in an objective function value that is not worse than the critical limit. The optimization problem is solved by crow search algorithm (CSA) and particle swarm optimization (PSO) and the results are compared. In mid‐term planning, with respect to the deviation factors of 0.05, 0.1, 0.15, 0.2, 0.25 and 0.3, optimal values of the uncertainty radius are 5.89%, 13.64%, 21.37%, 28.97%, 34.39% and 43.46%, respectively. In long‐term planning, with respect to the deviation factors of 0.05, 0.1, 0.15, 0.2, 0.25 and 0.3, optimal values of the uncertainty radius are 6.92%, 13.33%, 20.39%, 27.03%, 34% and 40.46%, respectively. Moreover, on average, CSA finds more promising results than PSO.

Optimal resilience-based restoration of a system subject to recurrent dependent hazards

Many engineered systems are faced with multiple natural and manmade hazards during operation. Since such hazards may cause system disruptions (e.g., catastrophic failure and performance deterioration), timely and effective restoration needs to be conducted to minimize the negative impacts of the hazards. In practice, these hazards are recurrent and often interact dynamically with each other. This causes a major challenge in assessing the performance of the systems and determining the optimal restoration policy from a holistic perspective. In this paper, we model the availability and resilience of a system subject to recurrent and dependent hazards and develop the optimal restoration policies for decision makers with different risk preferences. Particularly, we first model the random occurrence times and severities of a set of hazards whose occurrence frequencies and severities are dynamically dependent. Next, we derive the analytical expressions for the system's availability metrics. Third, we investigate the optimal restoration policies for both risk-neutral (RN) and risk-averse (RA) decision makers by solving two related optimization problems. A case study on the pipelines in the Mid-Atlantic area of the U.S. is provided to illustrate the practical values of the proposed availability assessment and resilience optimization methods.

INNOVATIVE BUSINESS MODEL FOR FOOD INDUSTRY ENTERPRISES OPERATING IN CONDITIONS OF GLOBAL DESTRUCTIVE PROCESSES IN THE ECONOMY

This research presents the development of strategic management foundations and crisis management mechanisms within the entrepreneurial structures of the food industry, including methods for overcoming crisis phenomena and ways of adapting to changing market conditions. This involves examining the impact of economic crises on entrepreneurial activity and developing effective anti-crisis management strategies that contribute to the preservation and development of economic stability under new conditions, taking into account innovative approaches in the economy. The study aims to identify key elements that should be integrated into business models to enhance their resilience to external shocks and market environment changes. Special attention is given to analyzing the role of innovation, digital transformation, and social responsibility in forming sustainable and adaptive business strategies capable of withstanding the challenges of global economic instability. An important aspect is the examination of enterprise behavior in response to potential types of threats to its economic activity, the risk of which increases during economic crisis periods. The process of implementing effective crisis management methods for food industry enterprises, facilitating early detection and neutralization of potential risks, is considered as a key factor in maintaining operational flexibility and strategic adaptability. This provides enterprises with the necessary foundation for making timely decisions, preventing losses, and seizing new market opportunities, which in turn contributes to strengthening their competitive positions in the long-term perspective. The implementation of these methods forms the basis for constructing an innovative business model for the operation of food industry enterprises in conditions of global destructive processes in the economy, taking into account the identification of key elements that should be integrated into the business model to enhance the resilience of the economic activity of the aforementioned entities under these conditions.

Substantiation of the Risk Neutralization Mechanism in the Financial Security Management of Agricultural Enterprises

Substantiation of the Risk Neutralization Mechanism in the Financial Security Management of Agricultural Enterprises

Цифровий форензік як сучасний інструмент забезпечення економічної безпеки підприємств

The purpose of the study is to substantiate the role of digital forensics as a modern tool for ensuring the economic security of enterprises. The high values of the number of criminal cases opened due to fraud in recent years, and especially in 2023-2024, indicate the spread of economic threats to enterprises, which becomes especially important in the conditions of the accelerated implementation of digital technologies. The dynamics of the financial results of enterprises in Ukraine indicate the insufficiency of the potential of enterprises to ensure economic security and stable development, and also indicate the need to use more effective measures to protect, prevent, and minimize the impact of threats, which today includes digital forensics. Economic forensics in foreign companies plays an important role in ensuring their economic security and stable functioning as separate business entities. When using forensics, digital tools characteristic of the Fourth Industrial Revolution are used, defining it as a high-tech service that not only allows timely detection, prediction and neutralization of various economic risks and crimes, which include financial fraud, corruption, money laundering, but also provides an opportunity to maintain economic transparency in domestic and international interactions of business structures. In Ukraine, the use of forensic practices is insufficient, despite the fact that the Association of Certified Fraud Investigation Specialists has determined that countries with a transformational economy in the business environment are most prone to economic risks, threats, and fraud. The experience of using economic forensics (especially its modern form – digital forensics) in the world allowed to determine the need for its application at domestic enterprises, which will be considered a step towards improving the corporate security culture of Ukrainian business activities, a significant contribution to the fight against economic crimes, as well as a guarantee of economic security the functioning of both individual entrepreneurs and the state economy in general.

Supply chain decision based on green investment subsidy and risk aversion.

Considering the risk aversion characteristics of supply chain members, how to effectively design the government subsidy strategy and green supply chain strategy is a realistic and urgent issue. Regarding this, we optimize and compare four three-stage Stackelberg game models between government and a two-echelon green supply chain, namely both manufacturer and retailer risk neutral (BN), manufacturer risk aversion while retailer risk neutral (MA), retailer risk aversion while manufacturer risk neutral (RA) and both manufacturer and retailer risk aversion (BA). The government as the leader decides the subsidy rate of green input cost with the goal of maximizing social welfare; the manufacturer as the first follower makes decisions on product greenness and wholesale price to maximize its own interests; and the retailer as the second follower determines retail prices to maximize its own interests. Employing mathematical reasoning and numerical simulation investigate thoroughly the effects of the government subsidies and the members' risk aversion. Results indicate that an appropriate government subsidy investment has a positive effect on optimal decisions and related benefits. Risk aversion is in favor of improvement of product greenness and social welfare while reduction of retail price. With the increase of manufacturer risk aversion, green subsidy investment rate and retailer expected revenue increase; on the contrary, the wholesale price and manufacturer expected revenue decrease. With the increase of retailer risk aversion, the wholesale price and manufacturer expected revenue increase, while green subsidy investment rate and retailer expected revenue decrease. In the model of BN, product greenness and social welfare are the lowest, while retail price is the highest. BA is opposite to BN. In the model of RA, green subsidy investment rate and retailer expected revenue the lowest, while wholesale price and manufacturer expected revenue the highest. RA is opposite to MA. The government should formulate appropriate subsidy policies to encourage manufacturers to produce green products and raise consumers' green awareness. Enterprises should control their own risk aversion and assess the risk aversion of the other party reasonably.

A Quick Trip to the Risk-Neutral Planet

Thanks to many years of re-educating people in quantitative finance, I know that there is a lot of confusion about the concept of risk neutrality. I say �re�-educating because very often it is those with classical Master's in Finance qualifications who are the most confused, precisely those who should have the best understanding. In my experience, Master's can demonstrate that it works, i.e., go through the motions of proof, but that is less of a problem than the interpretation. In this paper, I give a description that I�ve been using on the CQF1 for decades but never fully put in writing before. This is a description of how it works, not why.

Endogenous criteria for success

Economic agents are motivated to undertake costly actions by the prospect of being rewarded for successes and punished for failures. But what determines what a success looks like? This paper endogenizes the criteria for success in an otherwise standard principal-agent model with risk neutrality and limited liability. The set of feasible contracts is constrained by incentive constraints and possibly by a budget constraint. The first-order approach is not required to solve the problem. If the principal manipulates the criteria for success only to lower implementation costs, and depending on which type of constraint is more restrictive, the second-best action may be above or below the first-best action. In a class of problems where the principal's payoff depends directly on the criteria for success, the second-best solution features either more stringent criteria for success or a lower action (or both) than the first-best solution.

ТЕОРЕТИЧНІ ОСНОВИ УПРАВЛІННЯ КРЕДИТНИМ РИЗИКОМ БАНКУ

The purpose of the research is to generalize the existing theoretical and applied aspects, theoretical and methodological principles of neutralization of credit risks of banks in conditions of instability of the development of the financial market of Ukraine. Theoretical aspects of the essence of “credit risk" of the bank are analyzed and summarized in the article. The specifics of credit risk of banking institutions are determined. The author's definition of credit risk is formulated, which makes it possible to take into account its essential features as much as possible and indicates the value expression of the realization of credit risk and emphasizes that the violation of the condition of return of loan funds can be caused by the action of both external and internal factors. The main stages of credit risk management of a banking institution are considered in the research. They are: strategy preparation, planning, identification, evaluation, selection of methods, control and adjustment. The features of assessment methods and methods of credit risk management are characterized in the article. The risk management of the bank's credit portfolio can be reduced to the following - it is a set of methods and techniques, the application of which allows you to identify, evaluate, influence and control credit risk in order to maintain the balance of the credit portfolio and minimize possible losses from its implementation in practice. The purpose of this management is the formation of a credit portfolio with parameters that will ensure the highest profitability with the lowest risks.

Merely Means Paternalist? Prospect Theory and “Debiased” Welfare Analysis

AbstractBehavioral welfare economics usually aims at mere means paternalism, helping agents better pursue their own goals. This paper discusses one initially promising way to inform policies addressed at agents who violate expected utility theory (EUT), namely what I call “CPT debiasing.” I argue that this approach is problematic even if we grant the normative authority of EUT, the descriptive adequacy of CPT (cumulative prospect theory), and the general acceptability of means paternalism. First, it is doubtful whether the CPT utility function measures what its proponents intend. Second, by imposing risk neutrality on agents, the approach involves a more problematic paternalism.

Strategic risk management in conditions of unpredictability: the experience of Ukraine

The change in the concept of risk management following the current state of the economy of Ukraine is considered. Economic and socio-political factors that lead to crises are analyzed. It is proposed to constantly monitor and analyze risks, which is an essential and timely mechanism of anti-crisis management. The complex and protracted nature of the enterprise's risk system requires appropriate tools for their identification and assessment, which considers the need to review the strategic directions of diagnosis and analysis of relevant information for management decision-making. Particularly relevant in our publication is the development of approaches to the comprehensive assessment of the risks of the existence and effective operation of enterprises that are adequate to modern socio-economic requirements. The main risk assessment methods were analyzed, and the expediency of their use in the activities of enterprises was determined. An analysis of existing risks was carried out, among which the following were highlighted: market risks, risks of an unstable situation in the country, a change in the competitive environment, force majeure situations at the enterprise, and an increase in prices for energy resources. Methods of enterprise risk management to minimize or neutralize their negative impact, actions, and measures that make it possible to prevent the impact of risks on enterprise activity are proposed. Proposals for enterprises are focused on a thorough study of regional conflicts with their projection on the global level, the increase in the number and significance of pandemics, wars, and environmental and resource crises, which carry the irreversible nature of changes. It is noted that the enterprise in today's conditions of instability is offered to develop a set of strategic measures and principles that must be followed for production and economic activity to be effective. These measures are recommended for implementation in the company's strategy, which will optimize the structure and management process and contribute to the growth of the value of organizations. Keywords: risk, strategic risk management, risk classification, risk assessment methods, methods of risk neutralization, standards, recovery, economic growth.

Decentralized energy management system of distributed energy resources as virtual power plant: Economic risk analysis via downside risk constraints technique

A virtual power plant (VPP), as a decentralized energy management system (EMS), can be a handy application to aggregate and schedule distributed energy resources (DER). The DERs can be dispatchable and non-dispatchable energy resources wishing to participate in the day-ahead (DA) electricity market. Therefore, they can provide the grid with higher reliability and safety margins. However, there are uncertainties in the market that VPP should manage and the associated risks to obtain robust scheduling in such a probabilistic environment. In this paper, risk-oriented stochastic optimization is proposed to investigate the market's uncertainties and obtain the maximum profit while ensuring the safety margins of the network. Downside risk constraints (DRC) are integrated into the model to cover the risks. So, the risk-based scheduling of VPP is obtained. The proposed risk-based framework is formulated as the mixed-integer linear programming (MILP) model, solved by the CPLEX solver of GAMS software. The proposed model is applied to an 18-bus test system to investigate the proposed risk-oriented stochastic optimization of VPP. Finally, the costs, revenues, and total profit are illustrated, compared, and analyzed in the model's risk-neutral (RN) and risk-averse (RA) states so that an appropriate decision can be made. Moving toward the RA strategy lowers the amount of generated power of the DG and the purchased power from the upstream grid, consequently leading to a lower amount of sold power by the VPP within the studied power grid. The analysis shows that the RA strategy decides with low risk by decreasing the cost and revenue of the VPP simultaneously. In this regard, the results indicate that the average profit of the VPP decreased by 8.62%, from $15407 to $14079 when decision-maker tends to take risk-averse decisions with zero risk.

Integration of renewable energy sources into energy systems

The article analyzes the development trends for renewable energy sources in 2010-2021. The growing use of renewable energy sources in the global energy balance in developed and developing countries was revealed. The share of renewable sources in the production of electricity in 2021 was determined. The results presented in the form of approaches to the integration of renewable sources in order to replenish the production processes for the provision of energy services are based on an extensive assessment of scientific Russian and foreign literature. Integration of renewable energy sources will contribute to the sustainability of existing technologies and risk neutralization. The integrated approach will contribute to the interconnected provision of electricity, heat, cold and mobility

From the Editor and Chair of the Award Committee: 2022 Clemen–KleinmuntzDecision AnalysisBest Paper Award

From the Editor and Chair of the Award Committee: 2022 Clemen–Kleinmuntz<i>Decision Analysis</i>Best Paper Award

How Uncertainty Matters Under Risk Neutrality

It is typical in cost-effectiveness analysis to invoke a normative decision-making framework that assumes, as a starting point, that “a quality-adjusted life-year (QALY) is a QALY is a QALY.” The implication of this assumption is that the decision maker is risk neutral and that expected values could be considered sufficiently informative for a given “approve or reject” decision. Nevertheless, it seems intuitive that less uncertainty should be desirable and this has led some to incorporate “real” risk aversion (RA) into cost-effectiveness analysis.We illustrate in this article that RA is not always necessary to justify choosing more over less certain options. We show that for a risk neutral decision maker, greater uncertainty can make the approval of technology less likely in the presence of (1) model nonlinearities, (2) nonlinear opportunity costs, and (3) irreversible costs. We call these cases of “apparent” RA.Incorporating explicit risk preferences into decision making can be challenging; nevertheless, as we show here, it is not necessary to justify caring about uncertainty in approval decisions.

인질범죄에 대한 형의 임의적 감경 규정의 실효성 분석 연구

In order to protect the life and safety of hostages in hostage-taking crimes, Criminal Law stipulates provisions for reducing the sentence in Articles 295-2 and 324-6. The purpose of the regulation is to deter secondary crime against hostages as an incentive for actors to safely release hostages. However, it is somewhat questionable whether the preferential treatment of criminal policy at the level of arbitrary mitigation is an effective motive for the hostage offenders to safely release the hostage. Accordingly, using the sequential game model of game theory, this study analyzes what selective strategies are carried out under the interdependence between hostage criminals and law enforcement authorities.&#x0D; In the game model, the compensation vector of each participant used Becker's equation of criminal utility theory. First, the strategic choices of hostage offenders, law enforcement authorities, the general public, and law enforcement authorities were examined separately to derive the limit and general deterrence effects of the hostage release reduction regulations respectively. In addition, in the strategic choice analysis between hostage offenders and law enforcement authorities, the tendency of hostage offenders was divided into risk avoidance, risk neutrality, and risk preference type, and in each case, the hostage offender made a choice between necessary reduction or arbitrary reduction. In order to promote the safety of hostages, necessary reduction or exemption was found to be the most effective incentive. However, it should be noted that this result may give the wrong signal as an incentive for hostage crimes to the general public, who are potential criminals.&#x0D; Furthermore, this study also examines the possible improvements of the current liberation reduction regulations by reflecting the golden time in relation to the age of hostages. Given that the purpose of the liberation and mitigation regulations is to protect the lives and security of hostages, it is highly likely that the law enforcement authorities' attempts to negotiate after the golden time will be meaningless. It was confirmed that the golden time, which can guarantee the safety of the hostages, has a large time difference depending on the age of the hostages. As a result, in order to ensure the safety of hostages and to ensure the fair exercise of national punishment rights, the temporal application of the liberation and mitigation regulations should be more precisely defined by reflecting the golden time. In order to safely release hostages within the period by applying the golden time, the average time after victims are robbed and attracted, the need to define greater incentives for compensation than the current arbitrary reduction should be considered.&#x0D; Finally, this study suggests that the method of statistics collection and crime analysis on hostage crimes needs to be completely reorganized as a premise to reflect the difference in golden time in legislation.

Features of financial risk management of the enterprise in the conditions of transformational changes

The subject of the research is theoretical and methodological approaches to the management of financial risks of the enterprise. The purpose of the article is to study the essence of the concept of "financial risk", the factors of financial risks and the identification of the peculiarities of the management of financial risks of the enterprise in the conditions of transformational changes. Method or methodology of research. In the article, a set of methods of scientific knowledge was used to solve the tasks, which made it possible to realize the conceptual unity of scientific research. System method, method of generalization, methods of analysis and synthesis, comparison, scientific abstraction are applied. Results of the article. The article discusses approaches to defining the concept of "financial risk". Factors of financial risks of the enterprise are systematized. The need to manage the company's financial risks in conditions of transformational changes has been identified. Peculiarities and stages of financial risk management of the enterprise are studied. The conceptual principles of financial risk management of the enterprise in the system of its financial security are proposed, which will contribute to the application of risk neutralization methods and thus ensure the profitability of the business entity and a high level of financial security. Field of application of results. The results of the study can be used by enterprises in the development or modernization of the financial risk management system. Conclusions. In the conditions of instability and variability of the external economic environment, an effective financial risk management system of an enterprise has a positive effect on its financial and economic activity. In particular, it provides a set of measures to reduce the negative impact of financial risks on the results of the business entity and ensures the strengthening of its financial security in the conditions of transformational changes.

Score-Driven Modeling with Jumps: An Application to S&amp;P500 Returns and Options

Abstract We introduce a novel score-driven model with two sources of shock, allowing for both time-varying volatility and jumps. A theoretical investigation is performed which yields sufficient conditions to ensure stationarity and ergodicity. We extend the model to consider a time-varying jump intensity. Both an in-sample and an out-of-sample analysis based on the S&amp;P500 time series show that the proposed methodology provides excellent agreement with observed returns, outperforming more standard Generalized Autoregressive Conditional Heteroskedasticity (GARCH) specifications with jumps. Finally, we apply our models to option pricing via risk neutralization. Results show this novel approach produces reliable implied volatility surfaces. Supplementary Materials including proofs, the derivation of the conditional Fisher information, and two figures showing additional empirical results are available online.