Using integer programming for balancing return and risk in problems with individual chance constraints

In this paper, we study probabilistically constrained problems involving individual chance constraints, random univariate right‐hand sides, and risk tolerances defined as decision variables which affect part of the objective function. Built on the concept of efficient points, we formulate the problems as mixed‐integer programs by using binary variables to determine an optimal risk tolerance for each chance constraint. We develop two benchmark approaches, both of which solve chance‐constrained programs with fixed risk values in a bisection algorithm or by enumeration. We specify our approaches for a minimum cost flow problem and a network capacity design problem, both of which involve chance constraints for bounding the risk of demand shortages. We test instances with diverse size and complexity of the two network problems, and demonstrate the computational efficacy as well as give managerial insights.