09/16/03 4:17 PM Multiple Criteria Decision Making Combined with Finance: A Categorized Bibliographic Study RALPH E. STEUER Terry College of Business, University of Georgia, Athens, Georgia 30602-6253, USA PAUL NA Risk Methodology and Systems, Bayerische Landesbank, New York, New York 10022, USA ABSTRACT This paper provides a categorized bibliography on the application of the techniques of multiple criteria decision making (MCDM) to problems and issues in finance. A total of 265 references have been compiled and classified according to the methodological approaches of goal programming, multiple objective programming, the analytic hierarchy process (AHP), etc., and to the application areas of capital budgeting, working capital management, portfolio analysis, etc. The bibliography provides an overview of the literature on "MCDM combined with finance,” shows how contributions to the area have come from all over the world, facilitates access to the entirety of this heretofore fragmented literature, and underscores the often multiple criterion nature of many problems in finance. Keywords: bibliographic study, multiple criteria decision making, finance, portfolio analysis, goal programming, multiple objective programming, multi-criteria decision analysis, discrete alternative methods, analytic hierarchy process 1. Introduction Many normative decision models assume that a firm pursues the single objective of stockholder wealth maximization. However, a modern enterprise is a complex organization in which various stakeholders interact with one another, each with its own possible interpretation of wealth maximization, subject to concerns about risk, liquidity, social responsibility, environmental protection, employee welfare, and so forth. Consequently, it may well be appropriate to pursue a multiple objective approach to many financial decision making problems. With finance a key functional area and multiple criteria decision making (MCDM) ranked fifth in a recent study [C2] of the most frequently employed tools of operations research and management science, the purposes of this paper are to study the nature of the literature of “MCDM combined with finance” and to facilitate a convenient access to this literature that is only becoming more important as the world of finance becomes more mathematical. In Section 2 we show the geographic origins of the literature on MCDM combined with finance along with the range of outlets over which its publication, by force or by choice, has been spread. In Section 3 we provide a categorization by methodology of the articles compiled, and in Section 4 we provide a classification by area of application. Section 5 consists of concluding remarks. 2. Diversity of Origins and Dispersion of DisseminationMULTIPLE CRITERIA APPLICATIONS IN FINANCE 2 A total of 265 published references on MCDM combined with finance have been compiled. Of course, judgment is involved in borderline situations, but the characteristics we feel most often identify a paper as being as MCDM combined with finance are as follows: (a) The title contains both multiple criteria and financial language. (b) The abstract conveys both multiple criteria and financial ideas and content (where financial is interpreted to include accounting and other related nummular areas of endeavor). (c) The content decidedly addresses the paper’s MCDM and financial nature in an integrative fashion. (d) The list of references at the end shows a blending of the literatures to confirm the paper’s orientation. While most papers demonstrated all characteristics, it was not an absolute requirement that all four be present. For instance, we noticed papers that we felt were clearly finance and MCDM but showed little blending of the literatures in their lists of references. This was apparently the result of work on a financial problem in which the authors recognized the existence and impact of multiple criteria, but were presumably unaware of the extent to which the field of MCDM had been developed. Also motivating this study was the feeling that many people who had worked on projects involving both MCDM and finance were unaware of other MCDM combined with finance papers published perhaps many years before simply because there was no easy way to find out about them. By MCDM we mean multiple criteria with three or more objectives. Finance has traditionally recognized the two-objective situation of risk versus return, the risk-return efficient frontier, and the necessity to tradeoff risk against return in order to achieve a final solution. Such risk-return aspects have been extensively studied with single-criterion and parametric solution techniques that have long been well-known and are today contained in most corporate and investment finance textbooks. But what is not well-known are the new ways of looking at financial problems when three or more criteria exist, the pitfalls the naïve can fall into when attempting to practice MCDM without sufficient experience [C8, Chapters 5 and 6], and the ranges of sophisticated solution procedures that have only been developed relatively recently [C3]. Primarily, the difficulty encountered as we transit from two to three or more criteria is that the “efficient frontier” is no longer a frontier but becomes a surface. While it is possible to parameterize a frontier, it is not possible to parameterize a surface. This then leads to the methods and techniques of MCDM (i.e., MCDA (multi-criteria decision analysis or multiple criteria decision aid) which is a designation often used in Europe) that attempt to intelligently probe and sample the efficient set that may reside in up to k-1 dimensions (where k is the number of criteria) in a convergent fashion. Using the four characteristics above, the articles of this study were collected by first examining the Recent MCDM Journal Articles sections of the issues of MCDM WorldScan (the newsletter of the International Society on Multiple Criteria Decision Making). This resulted in 76 refereed journal articles over the period 1986-2001. In examining journals prior to 1986, 82 more refereed articles were identified. Along with significant content in 12 texts, the location of 52 contributions in conference proceedings volumes, and 43 more in books of readings, a total of 265 were obtained for inclusion. In Table 1, we show the distribution of the 265 articles by the type of volume or