On Exponential Utility and Conditional Value-at-Risk as Risk-Averse Performance Criteria

Abstract: The standard approach to risk-averse control is to use the Exponential Utility (EU) functional, which has been studied for several decades. Like other risk-averse utility functionals, EU encodes risk aversion through an increasing convex mapping $\varphi$ of objective costs to subjective costs. An objective cost is a realization $y$ of a random variable $Y$. In contrast, a subjective cost is a realization $\varphi(y)$ of a random variable $\varphi(Y)$ that has been transformed to measure preferences about the outcomes. For EU, the transformation is $\varphi(y) = \exp(\frac{-\theta}{2}y)$, and under certain conditions, the quantity $\varphi^{-1}(E(\varphi(Y)))$ can be approximated by a linear combination of the mean and variance of $Y$. More recently, there has been growing interest in risk-averse control using the Conditional Value-at-Risk (CVaR) functional. In contrast to the EU functional, the CVaR of a random variable $Y$ concerns a fraction of its possible realizations. If $Y$ is a continuous random variable with finite $E(|Y|)$, then the CVaR of $Y$ at level $\alpha$ is the expectation of $Y$ in the $\alpha \cdot 100 \%$ worst cases. Here, we study the applications of risk-averse functionals to controller synthesis and safety analysis through the development of numerical examples, with emphasis on EU and CVaR. Our contribution is to examine the decision-theoretic, mathematical, and computational trade-offs that arise when using EU and CVaR for optimal control and safety analysis. We are hopeful that this work will advance the interpretability and elucidate the potential benefits of risk-averse control technology.