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Incorporating Risk Aversion into Dynamic Programming Models

Author

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  • Jeffrey A. Krautkraemer
  • G. C. van Kooten
  • Douglas L. Young

Abstract

Most previous stochastic dynamic programming (DP) applications have assumed that decision makers are risk neutral; however, risk permeates both intrayear and interyear relationships in most DP problems. Incorporating risk aversion to intrayear outcomes alone can violate the independence assumption of expected utility and can destabilize long-run equilibrium returns. Aversion to riskiness of the long-run returns suppresses the effect of sequential resolution of risk over time. Because tolerance of short-run versus long-run risk varies in dynamic situations, procedures for incorporating risk aversion should accommodate this variation. More research on risk averse DP formulations is needed.

Suggested Citation

  • Jeffrey A. Krautkraemer & G. C. van Kooten & Douglas L. Young, 1992. "Incorporating Risk Aversion into Dynamic Programming Models," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 74(4), pages 870-878.
    • Handle: RePEc:oup:ajagec:v:74:y:1992:i:4:p:870-878.
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    File URL: http://hdl.handle.net/10.2307/1243184
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    Cited by:

    1. Emmanuelle Augeraud-Véron & Giorgio Fabbri & Katheline Schubert, 2019. "The Value of Biodiversity as an Insurance Device," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 101(4), pages 1068-1081.
    2. Shively, Gerald E., 2001. "Poverty, consumption risk, and soil conservation," Journal of Development Economics, Elsevier, vol. 65(2), pages 267-290, August.
    3. Watkins, K. Bradley & Lu, Yao-Chi & Huang, Wen-Yuan, 1998. "Economic And Environmental Feasibility Of Variable Rate Nitrogen Fertilizer Application With Carry-Over Effects," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 23(2), pages 1-26, December.
    4. Chandra Kiran B. Krishnamurthy, 2017. "Optimal Management of Groundwater Under Uncertainty: A Unified Approach," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 67(2), pages 351-377, June.
    5. Howitt, Richard E. & Reynaud, Arnaud & Msangi, Siwa & Knapp, Keith C., 2002. "Calibrated Stochastic Dynamic Models for Resource Management," 2002 Annual meeting, July 28-31, Long Beach, CA 19620, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    6. Frini, Anissa & Guitouni, Adel & Martel, Jean-Marc, 2012. "A general decomposition approach for multi-criteria decision trees," European Journal of Operational Research, Elsevier, vol. 220(2), pages 452-460.
    7. Kiran Krishnamurthy, Chandra, 2012. "Optimal Management of Groundwater under Uncertainty: A Unified Approach," CERE Working Papers 2012:19, CERE - the Center for Environmental and Resource Economics, revised 30 Jun 2014.
    8. Richard E. Howitt & Siwa Msangi & Arnaud Reynaud & Keith C. Knapp, 2005. "Estimating Intertemporal Preferences for Natural Resource Allocation," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 87(4), pages 969-983.

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