| Abstract: | This paper applies measures of risk to capacity expansion decisions made under uncertainty. Eight different decision making rules are constructed by varying both the frequency of the forecast updates and the hedge against uncertainty in a rolling horizon heuristic procedure. Using demand, capacity, and cost data from the utility division of a manufacturing company, the risk characteristics of each decision making rule are evaluated by simulation. The results indicate that annual forecast revisions hedged by ninety percent prediction limits are preferred over decision rules with less frequent forecast revisions or fixed-width hedges. |
