Trapping the Ultimate Success

We introduce a betting game where the gambler aims to guess the last success epoch in a series of inhomogeneous Bernoulli trials paced randomly in time. At a given stage, the gambler may bet on either the event that no further successes occur, or the event that exactly one success is yet to occur, or may choose any proper range of future times (a trap). When a trap is chosen, the gambler wins if the last success epoch is the only one that falls in the trap. The game is closely related to the sequential decision problem of maximising the probability of stopping on the last success. We use this connection to analyse the best-choice problem with random arrivals generated by a Pólya-Lundberg process.

A Model of Search with Two Stages of Information Acquisition and Additive Learning

This paper presents a model of choice with two stages of information acquisition. In this model, the choice problem can be interpreted as a variant of a more general multiarmed bandit problem. We assume that information acquisition takes a simple “additive form”—the value of an alternative is the sum of two components, which the decision maker can learn by undertaking two stages of information acquisition. This assumption yields a model that is tractable for the purposes of structural estimation. One possible application of the model is to online purchasing on e-commerce sites. For a consumer on an e-commerce website, there are potentially two stages of information acquisition: the consumer can obtain information about an alternative from (i) browsing the search results page and (ii) clicking on the alternative. By way of contrast, in much of the literature on structural econometric models of online purchasing, there is typically only one stage of information acquisition. Our paper may, therefore, provide a more realistic theory for modeling search, at least for those types of search—such as online purchasing—that involve two stages of information acquisition. This paper was accepted by Manel Baucells, behavioral economics and decision analysis.

Epidemic Control and Resource Allocation: Approaches and Implications for the Management of COVID-19

The experience with COVID-19 underscores a classic public policy choice problem: how should policymakers determine how to allocate constrained budgets, limited equipment, under-resourced hospitals and stretched personnel to limit the spread of the virus. This article presents an overview of the general literature on resource allocation in epidemics and assess how it informs our understanding of COVID-19. We highlight the peculiarities of the pandemic that call for a rethinking of existing approaches to resource allocation. In particular, we analyse how the experience of COVID-19 informs our understanding and modelling of the optimal resource allocation problem in epidemics. Our delineation of the literature focuses on resource constraint as the key variable. A qualitative appraisal indicates that the current suit of models for understanding the resource allocation problem requires adaptations to advance our management of COVID-19 or similar future epidemics. Particularly under-studied areas include issues of uncertainty, potential for co-epidemics, the role of global connectivity, and resource constrained problems arising from depressed economic activity. Incorporating various global dimensions of COVID-19 into resource allocation modelling such a centralized versus decentralized resource control and the role of geostrategic interests could yield crucial insights. This will require multi-disciplinary approaches to the resource allocation problem. JEL Classifications: I14, I18, E61, D60, H4, H12

The Willingness to Pay for Diversification

Diversification is a fundamental concept in economics and finance. This paper argues that decision makers have an intrinsic preference for diversification that is responsive to cost and that this willingness to pay for diversification is driven by risk aversion and loss aversion. In an experiment replicating a portfolio choice problem, the value of diversification is estimated to be at 5% of the initial endowment of approximately $100. Moreover, risk-averse and loss-averse individuals are willing to pay more for diversification. These findings point to the idea that diversification is a fundamental preference and may help explain portfolio choice anomalies such as irrational diversification, the diversification bias, and overdiversification. This paper was accepted by Tomasz Piskorski, finance.

Implied Ambiguity: Mean-Variance Inefficiency and Pricing Errors

We investigate the optimal portfolio choice problem for an investor who has a utility function of the smooth ambiguity model. We identify necessary and sufficient conditions for a given portfolio to be optimal for such an investor. We define the implied ambiguity of a portfolio as the smallest ambiguity aversion coefficient with which the portfolio is optimal, and the measure of ambiguity perception as the part of the variability in asset returns that can be attributed to the ambiguity. We show that there are one-to-one relations between the implied ambiguity, the Sharpe ratio, and the pricing errors when the portfolio is taken as the pricing portfolio, and that the measure of ambiguity perception is determined by the Sharpe ratio and the alpha. Based on the U.S. stock market data, we assess how ambiguity averse the representative investor is and what types of stocks the investor perceives as having more ambiguous returns than others. This paper was accepted by Manel Baucells, behavioral economics and decision analysis.

Optimal Portfolio Choice with Estimation Risk: No Risk-Free Asset Case

We propose an optimal combining strategy to mitigate estimation risk for the popular mean-variance portfolio choice problem in the case without a risk-free asset. We find that our strategy performs well in general, and it can be applied to known estimated rules and the resulting new rules outperform the original ones. We further obtain the exact distribution of the out-of-sample returns and explicit expressions of the expected out-of-sample utilities of the combining strategy, providing not only a fast and accurate way of evaluating the performance, but also analytical insights into the portfolio construction. This paper was accepted by Tyler Shumway, finance.

The organizations management multi-criteria objects aggregate rating construction

The article deals with the higher education institutions national aggregate rating constructing problem. This task is relevant in terms of improving management processes in educational organizations. This problem is formulated as a collective choice problem. Proposed to use voting in small groups as aggregation procedures, which satisfies the Condorcet principle. Three collective choice rules description is given in the paper. Obtained on the Bord, Copeland and Kemeny basis procedure salternatives final orderings stability is illustrated by concrete examples. The empirical mean is considered as a Kemeny median approximation. The Bord procedure instability with respect to changes in the initial scores obtained by universities in the ranking mechanisms under consideration is illustrated by examples. This paper presents the results of applying the described small-group voting procedures to a limited sample. This sample consists of data from 15 higher educational institutions from one of the Russian Federation regions. Universities constructed three aggregated ranks proximity degree was evaluated using two metrics - Kendall's rank correlation coefficient and Kemeny's distance. Based on the obtained results comparative analysis, it was made a conclusion about the expediency of using Condorcet-consistent collective selection procedures when constructing educational organizations aggregate ranking.

Application of the ontology of the choice of selection to describe the processes of interaction of subjects of military communication management

The ways of improving the mechanisms of information and analytical support of the command control system in the state of emergency are analyzed. The approach to the application of the ontology of the choice problem for decision-making in the field of law enforcement management using the procedure of integration of information resources based on the binary partial order relation is used. The purpose of the article is to increase the efficiency of decision-making in the management system of the military command in a state of emergency by applying the ontology of the choice problem based on a set of semantically significant results. Results of the research. Analysis and processing of large arrays of information in the field of military command management in a state of emergency should be carried out in an automated mode on the basis of a distributed software environment based on the principles of ontologies. Ontological systems, as a result of the inverse mapping of natural systems, provide the correct aggregation of various thematic processes through the formation of a structured set of information objects-concepts of the subject area, which are defined as a single type of data. The ontological representation of the contexts of units-concepts provides their integrated use in the process of solving complex tasks by the governing bodies of the command in a state of emergency. One of the constructive ways to integrate information resources as passive knowledge systems is to activate their concepts based on the process of forming thematic ontologies and combining these ontologies by building an ontology of the choice problem over them. The uniqueness of the ontology of the choice problem to any homotopy type allows to build the procedure of integration of information resources on the basis of a binary partial order relation. The partial order relation allows to reflect in an integrated way interaction of contexts of the notion-concepts defining subjects of information resources. The contradiction between the increase in the amount of information needed for decision-making in the field of management of interdepartmental critical systems and the constant requirement to reduce the time for its processing in the information-analytical systems has been resolved.