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Fast and frugal heuristics for portfolio decisions with positive project interactions

Fast and frugal heuristics for portfolio decisions with positive project interactions
Fast and frugal heuristics for portfolio decisions with positive project interactions
We consider portfolio decision problems with positive interactions between projects. Exact solutions to this problem require that all interactions are assessed, requiring time, expertise and effort that may not always be available. We develop and test a number of fast and frugal heuristics – psychologically plausible models that limit the number of assessments to be made and combine these in computationally simple ways – for portfolio decisions. The proposed “add-the-best” family of heuristics constructs a portfolio by iteratively adding a project that is best in a greedy sense, with various definitions of “best”. We present analytical results showing that information savings achievable by heuristics can be considerable; a simulation experiment showing that portfolios selected by heuristics can be close to optimal under certain conditions; and a behavioral laboratory experiment demonstrating that choices are often consistent with the use of heuristics. Add-the-best heuristics combine descriptive plausibility with effort-accuracy trade-offs that make them potentially attractive for prescriptive use.
Behavioral decision making, Decision analysis, Decision making, Heuristics, Portfolio selection
0167-9236
Durbach, Ian
7f319040-aa8b-431b-bf29-4f4d3ba2762c
Algorta, Simon
b5df4f02-c868-42b9-8e2e-730c14a9c7b2
Kantu, Dieudonne
f76d6396-ad9d-4e47-a911-fc96fcc3383a
Katsikopoulos, Konstantinos
b97c23d9-8b24-4225-8da4-be7ac2a14fba
Simsek, Ozgur
060bc721-d839-43c5-8179-9e5d057e582c
Durbach, Ian
7f319040-aa8b-431b-bf29-4f4d3ba2762c
Algorta, Simon
b5df4f02-c868-42b9-8e2e-730c14a9c7b2
Kantu, Dieudonne
f76d6396-ad9d-4e47-a911-fc96fcc3383a
Katsikopoulos, Konstantinos
b97c23d9-8b24-4225-8da4-be7ac2a14fba
Simsek, Ozgur
060bc721-d839-43c5-8179-9e5d057e582c

Durbach, Ian, Algorta, Simon, Kantu, Dieudonne, Katsikopoulos, Konstantinos and Simsek, Ozgur (2020) Fast and frugal heuristics for portfolio decisions with positive project interactions. Decision Support Systems, 138, [113399]. (doi:10.1016/j.dss.2020.113399).

Record type: Article

Abstract

We consider portfolio decision problems with positive interactions between projects. Exact solutions to this problem require that all interactions are assessed, requiring time, expertise and effort that may not always be available. We develop and test a number of fast and frugal heuristics – psychologically plausible models that limit the number of assessments to be made and combine these in computationally simple ways – for portfolio decisions. The proposed “add-the-best” family of heuristics constructs a portfolio by iteratively adding a project that is best in a greedy sense, with various definitions of “best”. We present analytical results showing that information savings achievable by heuristics can be considerable; a simulation experiment showing that portfolios selected by heuristics can be close to optimal under certain conditions; and a behavioral laboratory experiment demonstrating that choices are often consistent with the use of heuristics. Add-the-best heuristics combine descriptive plausibility with effort-accuracy trade-offs that make them potentially attractive for prescriptive use.

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DECSUP-D-20-00521R1 - Accepted Manuscript
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More information

Accepted/In Press date: 29 August 2020
e-pub ahead of print date: 6 September 2020
Keywords: Behavioral decision making, Decision analysis, Decision making, Heuristics, Portfolio selection

Identifiers

Local EPrints ID: 443770
URI: http://eprints.soton.ac.uk/id/eprint/443770
ISSN: 0167-9236
PURE UUID: 69af9912-d7e7-4111-ab49-34c04b714cfc
ORCID for Konstantinos Katsikopoulos: ORCID iD orcid.org/0000-0002-9572-1980

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Date deposited: 11 Sep 2020 16:30
Last modified: 28 Apr 2022 04:17

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Contributors

Author: Ian Durbach
Author: Simon Algorta
Author: Dieudonne Kantu
Author: Ozgur Simsek

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