Integration-segregation decisions under general value functions: "create your own bundle - choose 1, 2, or all 3!",

Egozcue, Martin, Massoni, Sebastien, Wong, Wing-Keung, & Zitikis, Ricardas (2014) Integration-segregation decisions under general value functions: "create your own bundle - choose 1, 2, or all 3!",. IMA Journal of Management Mathematics, 25(1), pp. 57-72.

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Abstract

Whether to keep products segregated (e.g., unbundled) or integrate some or all of them (e.g., bundle) has been a problem of profound interest in areas such as portfolio theory in finance, risk capital allocations in insurance and marketing of consumer products. Such decisions are inherently complex and depend on factors such as the underlying product values and consumer preferences, the latter being frequently described using value functions, also known as utility functions in economics. In this paper, we develop decision rules for multiple products, which we generally call ‘exposure units’ to naturally cover manifold scenarios spanning well beyond ‘products’. Our findings show, e.g. that the celebrated Thaler's principles of mental accounting hold as originally postulated when the values of all exposure units are positive (i.e. all are gains) or all negative (i.e. all are losses). In the case of exposure units with mixed-sign values, decision rules are much more complex and rely on cataloging the Bell number of cases that grow very fast depending on the number of exposure units. Consequently, in the present paper, we provide detailed rules for the integration and segregation decisions in the case up to three exposure units, and partial rules for the arbitrary number of units.

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ID Code: 61529
Item Type: Journal Article
Refereed: Yes
DOI: 10.1093/imaman/dps024
ISSN: 1471-6798
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Deposited On: 24 Jul 2013 05:28
Last Modified: 01 Sep 2014 04:40

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