IDEAS home Printed from https://ideas.repec.org/a/eee/reensy/v218y2022ipas0951832021005974.html
   My bibliography  Save this article

Life-cycle optimization of structural systems based on cumulative prospect theory: Effects of the reference point and risk attitudes

Author

Listed:
  • Cheng, Minghui
  • Frangopol, Dan M.

Abstract

Reliability-, risk-, and utility-based life-cycle maintenance is a normative approach for rational decision-making regarding structural systems under uncertainty. However, since these indicators cannot reflect the preference of stakeholders, the obtained plans may not be optimal from their standpoints. One of the most popular models to describe people's decisions under risk is cumulative prospect theory (CPT). CPT can capture the attitudes towards high consequence and low probability associated with structural failure by the value function and probability weighting function, respectively. CPT can also handle different risk attitudes towards gains and losses by introducing a reference point. Previous studies on calibration of CPT were developed for economics, healthcare, and traveling rout choices. Their results may not hold for civil infrastructure. Therefore, the parameters of CPT (i.e. value function, probability weighting function, and reference point) are calibrated through a survey among students and practicing engineers in the field of structural engineering. The fitted model is applied to life-cycle maintenance of a steel girder bridge. The calibration results show that the reference point is set to a prescribed plan. It is shown by the illustrative example that the reference point and opposite risk attitudes can significantly affect optimal decisions when searching for riskier plans.

Suggested Citation

  • Cheng, Minghui & Frangopol, Dan M., 2022. "Life-cycle optimization of structural systems based on cumulative prospect theory: Effects of the reference point and risk attitudes," Reliability Engineering and System Safety, Elsevier, vol. 218(PA).
    • Handle: RePEc:eee:reensy:v:218:y:2022:i:pa:s0951832021005974
    DOI: 10.1016/j.ress.2021.108100
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0951832021005974
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ress.2021.108100?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. repec:eee:reensy:v:190:y:2019:i:c:p:- is not listed on IDEAS
    2. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    3. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
    4. Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, vol. 47(11), pages 1498-1514, November.
    5. Toon Haer & W. J. Wouter Botzen & Hans de Moel & Jeroen C. J. H. Aerts, 2017. "Integrating Household Risk Mitigation Behavior in Flood Risk Analysis: An Agent‐Based Model Approach," Risk Analysis, John Wiley & Sons, vol. 37(10), pages 1977-1992, October.
    6. Camerer, Colin F & Ho, Teck-Hua, 1994. "Violations of the Betweenness Axiom and Nonlinearity in Probability," Journal of Risk and Uncertainty, Springer, vol. 8(2), pages 167-196, March.
    7. Lin, Chen & Xiao, Hui & Peng, Rui & Xiang, Yisha, 2021. "Optimal defense-attack strategies between M defenders and N attackers: A method based on cumulative prospect theory," Reliability Engineering and System Safety, Elsevier, vol. 210(C).
    8. Barone, Giorgio & Frangopol, Dan M., 2014. "Reliability, risk and lifetime distributions as performance indicators for life-cycle maintenance of deteriorating structures," Reliability Engineering and System Safety, Elsevier, vol. 123(C), pages 21-37.
    9. Keeney,Ralph L. & Raiffa,Howard, 1993. "Decisions with Multiple Objectives," Cambridge Books, Cambridge University Press, number 9780521438834, September.
    10. Selvik, J.T. & Aven, T., 2011. "A framework for reliability and risk centered maintenance," Reliability Engineering and System Safety, Elsevier, vol. 96(2), pages 324-331.
    11. George Wu & Richard Gonzalez, 1996. "Curvature of the Probability Weighting Function," Management Science, INFORMS, vol. 42(12), pages 1676-1690, December.
    12. Libby, Robert & Bloomfield, Robert & Nelson, Mark W., 2002. "Experimental research in financial accounting," Accounting, Organizations and Society, Elsevier, vol. 27(8), pages 775-810, November.
    13. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    14. Cha, Eun Jeong & Ellingwood, Bruce R., 2012. "Risk-averse decision-making for civil infrastructure exposed to low-probability, high-consequence events," Reliability Engineering and System Safety, Elsevier, vol. 104(C), pages 27-35.
    15. Wilton, Edgar & Delarue, Erik & D’haeseleer, William & van Sark, Wilfried, 2014. "Reconsidering the capacity credit of wind power: Application of cumulative prospect theory," Renewable Energy, Elsevier, vol. 68(C), pages 752-760.
    16. Mitropoulou, Chara Ch. & Lagaros, Nikos D. & Papadrakakis, Manolis, 2011. "Life-cycle cost assessment of optimally designed reinforced concrete buildings under seismic actions," Reliability Engineering and System Safety, Elsevier, vol. 96(10), pages 1311-1331.
    17. Thekdi, Shital & Aven, Terje, 2019. "An integrated perspective for balancing performance and risk," Reliability Engineering and System Safety, Elsevier, vol. 190(C), pages 1-1.
    18. Nicholas C. Barberis, 2013. "Thirty Years of Prospect Theory in Economics: A Review and Assessment," Journal of Economic Perspectives, American Economic Association, vol. 27(1), pages 173-196, Winter.
    19. Häckel, Björn & Pfosser, Stefan & Tränkler, Timm, 2017. "Explaining the energy efficiency gap - Expected Utility Theory versus Cumulative Prospect Theory," Energy Policy, Elsevier, vol. 111(C), pages 414-426.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Pedersen, Tom Ivar & Vatn, Jørn, 2022. "Optimizing a condition-based maintenance policy by taking the preferences of a risk-averse decision maker into account," Reliability Engineering and System Safety, Elsevier, vol. 228(C).
    2. Kristjanpoller, Fredy & Cárdenas-Pantoja, Nicolás & Viveros, Pablo & Pascual, Rodrigo, 2023. "Wind farm life cycle cost modelling based on oversizing capacity under load sharing configuration," Reliability Engineering and System Safety, Elsevier, vol. 236(C).
    3. Carlon, André Gustavo & Kroetz, Henrique Machado & Torii, André Jacomel & Lopez, Rafael Holdorf & Miguel, Leandro Fleck Fadel, 2022. "Risk optimization using the Chernoff bound and stochastic gradient descent," Reliability Engineering and System Safety, Elsevier, vol. 223(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aurélien Baillon & Han Bleichrodt & Vitalie Spinu, 2020. "Searching for the Reference Point," Management Science, INFORMS, vol. 66(1), pages 93-112, January.
    2. Mohammed Abdellaoui & Olivier L’Haridon & Horst Zank, 2010. "Separating curvature and elevation: A parametric probability weighting function," Journal of Risk and Uncertainty, Springer, vol. 41(1), pages 39-65, August.
    3. Jakusch, Sven Thorsten & Meyer, Steffen & Hackethal, Andreas, 2019. "Taming models of prospect theory in the wild? Estimation of Vlcek and Hens (2011)," SAFE Working Paper Series 146, Leibniz Institute for Financial Research SAFE, revised 2019.
    4. Eyal Baharad & Doron Kliger, 2013. "Market failure in light of non-expected utility," Theory and Decision, Springer, vol. 75(4), pages 599-619, October.
    5. Tamás Csermely & Alexander Rabas, 2016. "How to reveal people’s preferences: Comparing time consistency and predictive power of multiple price list risk elicitation methods," Journal of Risk and Uncertainty, Springer, vol. 53(2), pages 107-136, December.
    6. Henry Stott, 2006. "Cumulative prospect theory's functional menagerie," Journal of Risk and Uncertainty, Springer, vol. 32(2), pages 101-130, March.
    7. Mary Riddel, 2012. "Comparing risk preferences over financial and environmental lotteries," Journal of Risk and Uncertainty, Springer, vol. 45(2), pages 135-157, October.
    8. Diecidue, Enrico & Schmidt, Ulrich & Zank, Horst, 2009. "Parametric weighting functions," Journal of Economic Theory, Elsevier, vol. 144(3), pages 1102-1118, May.
    9. Azevedo, Eduardo M. & Gottlieb, Daniel, 2012. "Risk-neutral firms can extract unbounded profits from consumers with prospect theory preferences," Journal of Economic Theory, Elsevier, vol. 147(3), pages 1291-1299.
    10. Victor H. Gonzalez-Jimenez, 2019. "Contracting Probability Distortions," Vienna Economics Papers vie1901, University of Vienna, Department of Economics.
    11. Neszveda, G., 2019. "Essays on behavioral finance," Other publications TiSEM 05059039-5236-42a3-be1b-3, Tilburg University, School of Economics and Management.
    12. Martín Egozcue & Luis Fuentes García & Ričardas Zitikis, 2023. "The Slicing Method: Determining Insensitivity Regions of Probability Weighting Functions," Computational Economics, Springer;Society for Computational Economics, vol. 61(4), pages 1369-1402, April.
    13. Katarzyna M. Werner & Horst Zank, 2019. "A revealed reference point for prospect theory," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 67(4), pages 731-773, June.
    14. Hamza Bahaji, 2011. "Incentives from stock option grants: a behavioral approach," Post-Print halshs-00681611, HAL.
    15. Durbach, Ian N. & Stewart, Theodor J., 2012. "Modeling uncertainty in multi-criteria decision analysis," European Journal of Operational Research, Elsevier, vol. 223(1), pages 1-14.
    16. Victor H. Gonzalez-Jimenez, 2019. "Contracting Probability Distortions," Vienna Economics Papers 1901, University of Vienna, Department of Economics.
    17. Jinrui Pan & Craig S. Webb & Horst Zank, 2019. "Delayed probabilistic risk attitude: a parametric approach," Theory and Decision, Springer, vol. 87(2), pages 201-232, September.
    18. Marcello Basili & Alain Chateauneuf & Fulvio Fontini, 2005. "Choices Under Ambiguity With Familiar And Unfamiliar Outcomes," Theory and Decision, Springer, vol. 58(2), pages 195-207, March.
    19. Davies, G.B. & Satchell, S.E., 2004. "Continuous Cumulative Prospect Theory and Individual Asset Allocation," Cambridge Working Papers in Economics 0467, Faculty of Economics, University of Cambridge.
    20. Pavlo R. Blavatskyy, 2005. "Back to the St. Petersburg Paradox?," Management Science, INFORMS, vol. 51(4), pages 677-678, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:reensy:v:218:y:2022:i:pa:s0951832021005974. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/reliability-engineering-and-system-safety .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.