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Possibilistic risk aversion in group decisions: theory with application in the insurance of giga-investments valued through the fuzzy pay-off method

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Abstract

Giga-investments are large industrial investments that have long construction times, long economic lives, and that are to a large degree irreversible. These characteristics make ex-ante analysis of giga-investment difficult and require methods that can consider estimation of imprecision and the value of managerial flexibility. Fuzzy pay-off method is a recently introduced profitability analysis tool, based on using managerial cash-flow scenarios estimated by a group of experts, to form a fuzzy (possibilistic) pay-off distribution for an investment that is compatible with the requirements set by the circumstances surrounding giga-investments. Due to their large size, most giga-investments require external financing and most often lead investors must acquire insurance coverage to bring down the idiosyncratic risk of these projects to attract funding. Defining an insurance strategy requires an estimation of the risk as perceived by the group of experts (managers), who are supposed to be risk-averse. In this vein, this paper analyzes the effect of the risk aversion in the possibilistic setting, relevant to giga-investments, and in a multi-expert decision-making context. Insurance pricing for a giga-investment risk is reached through finding an optimal coinsurance rate in the group possibilistic framework. The presented models are new and contribute to the project insurance pricing literature.

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Authors and Affiliations

  1. School of Business and Management, Lappeenranta University of Technology, Skinnarilankatu 34, 53850, Lappeenranta, Finland

    Mikael Collan, Mario Fedrizzi & Pasi Luukka

  2. Department of Industrial Engineering, University of Trento, Via Sommarive 9, 38122, Trento, Italy

    Mario Fedrizzi

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  1. Mikael Collan
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Correspondence to Mikael Collan.

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Collan, M., Fedrizzi, M. & Luukka, P. Possibilistic risk aversion in group decisions: theory with application in the insurance of giga-investments valued through the fuzzy pay-off method. Soft Comput 21, 4375–4386 (2017). https://doi.org/10.1007/s00500-016-2069-2

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