A Monte Carlo procedure is used to demonstrate the dangers of basing (farm) risk programming on only a few states of nature and to study the impact of applying alternative risk programming methods. Two risk programming formulations are considered, namely mean-variance (E,V) programming and utility efficient (UE) programming. For the particular example of a Norwegian mixed livestock and crop farm, the programming solution is unstable with few states, although the cost of picking a sub-optimal plan declines with increases in number of states. Comparing the E,V results with the UE results shows that there were few discrepancies between the two and the differences which do occur are mainly trivial, thus both methods gave unreliable results in cases with small samples.
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Lien, G., Hardaker, J.B., van Asseldonk, M.A.P.M. et al. Risk programming analysis with imperfect information. Ann Oper Res 190, 311–323 (2011). https://doi.org/10.1007/s10479-009-0555-y
- Quadratic risk programming
- States of nature
- Sparse data
- Kernel smoothing