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Risk-averse decision making in overbooking problem

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Listed:
  • H Xiong

    (Tsinghua University)

  • J Xie

    (Tsinghua University)

  • X Deng

    (Tsinghua University)

Abstract

Traditional literature studying overbooking problems focuses on risk-neutral decision makers. In this paper, we propose a multi-period overbooking model incorporating risk-aversion and extend well-known structural results (the 3-region policy) under the risk-neutral case to the risk-averse one on the basis of an exponential utility function. We also show that the optimal policy for the risk-neutral decision maker can be obtained by letting the risk-aversion parameter approach to zero under the risk-averse case. Therefore, the extant results under the risk-neutral case can be interpreted as a special case of ours. We also investigate how the optimal policy changes with some cost parameters and the decision maker's degree of risk-aversion. Numerical results suggest that the optimal bounds in the 3-region policy may increase or decrease with the decision maker's degree of risk-aversion.

Suggested Citation

  • H Xiong & J Xie & X Deng, 2011. "Risk-averse decision making in overbooking problem," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 62(9), pages 1655-1665, September.
    • Handle: RePEc:pal:jorsoc:v:62:y:2011:i:9:d:10.1057_jors.2010.130
    DOI: 10.1057/jors.2010.130
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