Decision-making under Risk: A Ship Sale and Purchase Problem by Utilizing Cumulative Prospect Theory

Decision-making is often performed intuitively, yet formal decision-making by logical reasoning is needed for crosschecking or advocating despite its being burdensome and comprehensive. Prescriptive and descriptive approaches have been introduced for formal decision-making. Former regards decision makers as, metaphorically, rational computers whereas latter considers the human perception of value and probability differentiating in case of loss and gain. To the best of our knowledge, no research has been conducted on a ship sale and purchase problem based on a descriptive method to explain human risk aversive nature, perception of value, and probability. This study is therefore unique in the academic literature. This research includes the presentation of formal decision-making, related approaches, methods, and theories, the application of cumulative prospect theory (CPT) on a ship sale and purchase problem. An empirical study has been created and modeled, including statistical data concerning fuel oil prices and freight rate profit margins. A voyage estimation based on the empirical study is performed, calculations are carried out by utilizing the expected value method and CPT. Results obtained are quite useful for a better understanding formal decision-making, prescriptive, and descriptive approaches, and interpreting status-quo in demand for bulk carriers.