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Robustness in Sequential Investment Decisions

Author

Listed:
  • Shiv K. Gupta

    (University of Pennsylvania)

  • Jonathan Rosenhead

    (London School of Economics)

Abstract

Long-range investment plans, particularly for expansion or decentralization, often consist of a number of separate but interacting investments spaced over a number of years. Where there is appreciable uncertainty about external conditions in the future, it is possible that a "best" scheme based on the state of current knowledge will prove during the course of the intervening years to be less than good. One way of guarding against this danger is to ensure that the early (and therefore irreversible) steps in the investment sequence keep open as many options of "good" schemes as possible. Concepts of robustness and stability are developed. As a practical example of the use of these concepts a case study is presented, which deals with the location of sites for new factories in an industrial expansion program.

Suggested Citation

  • Shiv K. Gupta & Jonathan Rosenhead, 1968. "Robustness in Sequential Investment Decisions," Management Science, INFORMS, vol. 15(2), pages 18-29, October.
    • Handle: RePEc:inm:ormnsc:v:15:y:1968:i:2:p:b18-b29
    DOI: 10.1287/mnsc.15.2.B18
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    Cited by:

    1. Gutierrez, Genaro J. & Kouvelis, Panagiotis & Kurawarwala, Abbas A., 1996. "A robustness approach to uncapacitated network design problems," European Journal of Operational Research, Elsevier, vol. 94(2), pages 362-376, October.
    2. Ion Georgiou & Joaquim Heck, 2021. "The emergence of problem structuring methods, 1950s–1989: An atlas of the journal literature," Systems Research and Behavioral Science, Wiley Blackwell, vol. 38(6), pages 756-796, November.
    3. Driouchi, Tarik & Leseure, Michel & Bennett, David, 2009. "A robustness framework for monitoring real options under uncertainty," Omega, Elsevier, vol. 37(3), pages 698-710, June.
    4. Li, Na & Jiang, Yue & Zhang, Zhi-Hai, 2021. "A two-stage ambiguous stochastic program for electric vehicle charging station location problem with valet charging service," Transportation Research Part B: Methodological, Elsevier, vol. 153(C), pages 149-171.
    5. Grubbstrom, Robert W. & Olhager, Jan, 1997. "Productivity and flexibility: Fundamental relations between two major properties and performance measures of the production system," International Journal of Production Economics, Elsevier, vol. 52(1-2), pages 73-82, October.
    6. John Friend, 2006. "Labels, methodologies and strategic decision support," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 57(7), pages 772-775, July.
    7. J Rosenhead, 2009. "Reflections on fifty years of operational research," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 60(1), pages 5-15, May.
    8. Hahn, G.J. & Kuhn, H., 2012. "Simultaneous investment, operations, and financial planning in supply chains: A value-based optimization approach," International Journal of Production Economics, Elsevier, vol. 140(2), pages 559-569.
    9. Alizadeh, Reza & Lund, Peter D. & Beynaghi, Ali & Abolghasemi, Mahdi & Maknoon, Reza, 2016. "An integrated scenario-based robust planning approach for foresight and strategic management with application to energy industry," Technological Forecasting and Social Change, Elsevier, vol. 104(C), pages 162-171.
    10. Yard, Stefan, 2000. "Developments of the payback method," International Journal of Production Economics, Elsevier, vol. 67(2), pages 155-167, September.
    11. H-Y Wong, 2007. "Using Robustness Analysis to structure online marketing and communication problems," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 58(5), pages 633-644, May.
    12. Hites, R. & De Smet, Y. & Risse, N. & Salazar-Neumann, M. & Vincke, P., 2006. "About the applicability of MCDA to some robustness problems," European Journal of Operational Research, Elsevier, vol. 174(1), pages 322-332, October.
    13. Christoph Dorsch, 2015. "On the Sound Financial Valuation of Flexibility in Information Systems," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 57(2), pages 115-127, April.
    14. Eustace, Deogratias & Russell, Sr., Eugene R. & Landman, E. Dean, 2003. "Application of Robustness Analysis for Developing a Procedure for Better Urban Transportation Planning Decisions," Journal of the Transportation Research Forum, Transportation Research Forum, vol. 42(1).
    15. Mausser, Helmut E. & Laguna, Manuel, 1999. "A heuristic to minimax absolute regret for linear programs with interval objective function coefficients," European Journal of Operational Research, Elsevier, vol. 117(1), pages 157-174, August.
    16. Hüser, Christian, 2006. "Robustness - a challenge also for the 21st century: A review of robustness phenomena in technical, biological and social systems as well as robust approaches in engineering, computer science, operatio," UFZ Discussion Papers 2/2006, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
    17. Włodzimierz Ogryczak, 2010. "Conditional median as a robust solution concept for uncapacitated location problems," TOP: An Official Journal of the Spanish Society of Statistics and Operations Research, Springer;Sociedad de Estadística e Investigación Operativa, vol. 18(1), pages 271-285, July.

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