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A comparison between the robust risk-aware and risk-seeking managers in R&D portfolio management

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  • Shuyi Wang

    (Alliance Data)

  • Aurélie Thiele

    (Southern Methodist University)

Abstract

In this paper, we analyze two mathematical modeling frameworks that reflect different managerial attitudes toward upside risk in the context of R&D portfolio selection. The manager seeks to allocate a development budget between low-risk, low-reward projects, called incremental projects, and high-risk, high-reward projects, called innovational projects. Because of their highly uncertain nature and significant probability of failure, the expected value of the innovational projects is smaller than that of their incremental projects’ counterpart, but the long-term financial health of a company necessitates to take risk in order to maintain growth. We study the differences in strategy and portfolio’s risk profile that arise between a risk-aware manager, who takes upside risk because he has to for the long-term competitive advantage of his company, and a risk-seeking manager, who will take as big a bet as allowed by the model. To the best of our knowledge, this is the first paper to consider upside risk management using a robust-optimization-like methodology.

Suggested Citation

  • Shuyi Wang & Aurélie Thiele, 2017. "A comparison between the robust risk-aware and risk-seeking managers in R&D portfolio management," Computational Management Science, Springer, vol. 14(2), pages 197-213, April.
    • Handle: RePEc:spr:comgts:v:14:y:2017:i:2:d:10.1007_s10287-016-0271-4
    DOI: 10.1007/s10287-016-0271-4
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    References listed on IDEAS

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    1. Gabrel, Virginie & Murat, Cécile & Thiele, Aurélie, 2014. "Recent advances in robust optimization: An overview," European Journal of Operational Research, Elsevier, vol. 235(3), pages 471-483.
    2. Raul O. Chao & Stylianos Kavadias, 2008. "A Theoretical Framework for Managing the New Product Development Portfolio: When and How to Use Strategic Buckets," Management Science, INFORMS, vol. 54(5), pages 907-921, May.
    3. Ming Ding & Jehoshua Eliashberg, 2002. "Structuring the New Product Development Pipeline," Management Science, INFORMS, vol. 48(3), pages 343-363, March.
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    Cited by:

    1. Theresa Eckert & Stefan Hüsig, 2022. "Innovation portfolio management: a systematic review and research agenda in regards to digital service innovations," Management Review Quarterly, Springer, vol. 72(1), pages 187-230, February.

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