Uncertainties in stochastic programming models: The minimax approach

50 years ago, stochastic programming was introduced to deal with uncertain values of coefficients which were observed in applications of mathematical programming. These uncertainties were modeled as random and the assumption of complete knowledge of the probability distribution of random parameters became a standard. Hence, there is a new type of uncertainty concerning the probability distribution. Using a hypothetical, ad hoc distribution may lead to bad, costly decisions. Besides of a subsequent output analysis it pays to include the existing, possibly limited information into the model, cf. the minimax approach which will be the main item of this presentation. It applies to cases when the probability distribution is only known to belong to a specified class of probability distributions and one wishes to hedge against the least favorable distribution. The minimax approach has been developed for special types of stochastic programs and special choices of the class of probability distributions and there are recent results aiming at algorithmic solution of minimax problems and on stability properties of minimax solutions

Models for Minimax Stochastic Linear Optimization Problems with Risk Aversion

We propose a semidefinite optimization (SDP) model for the class of minimax two-stage stochastic linear optimization problems with risk aversion. The distribution of second-stage random variables belongs to a set of multivariate distributions with known first and second moments. For the minimax stochastic problem with random objective, we provide a tight SDP formulation. The problem with random right-hand side is NP-hard in general. In a special case, the problem can be solved in polynomial time. Explicit constructions of the worst-case distributions are provided. Applications in a production-transportation problem and a single facility minimax distance problem are provided to demonstrate our approach. In our experiments, the performance of minimax solutions is close to that of data-driven solutions under the multivariate normal distribution and better under extremal distributions. The minimax solutions thus guarantee to hedge against these worst possible distributions and provide a natural distribution to stress test stochastic optimization problems under distributional ambiguity.Singapore-MIT Alliance for Research and TechnologyNational University of Singapore. Dept. of Mathematic

Robust two-stage stochastic linear optimization with risk aversion

We study a two-stage stochastic linear optimization problem where the recourse function is risk-averse rather than risk neutral. In particular, we consider the mean-conditional value-at-risk objective function in the second stage. The model is robust in the sense that the distribution of the underlying random variable is assumed to belong to a certain family of distributions rather than to be exactly known. We start from analyzing a simple case where uncertainty arises only in the objective function, and then explore the general case where uncertainty also arises in the constraints. We show that the former problem is equivalent to a semidefinite program and the latter problem is generally NP-hard. Applications to two-stage portfolio optimization, material order problems, stochastic production-transportation problem and single facility minimax distance problem are considered. Numerical results show that the proposed robust risk-averse two-stage stochastic programming model can effectively control the risk with solutions of acceptable good quality

Maximum Downside Semi Deviation Stochastic Programming for Portfolio Optimization Problem

Portfolio optimization is an important research field in financial decision making. The chief character within optimization problems is the uncertainty of future returns. Probabilistic methods are used alongside optimization techniques. Markowitz (1952, 1959) introduced the concept of risk into the problem and used a mean-variance model to identify risk with the volatility (variance) of the random objective. The mean-risk optimization paradigm has since been expanded extensively both theoretically and computationally. A single stage and two stage stochastic programming model with recourse are presented for risk averse investors with the objective of minimizing the maximum downside semideviation. The models employ the here-and-now approach, where a decision-maker makes a decision before observing the actual outcome for a stochastic parameter. The optimal portfolios from the two models are compared with the incorporation of the deviation measure. The models are applied to the optimal selection of stocks listed in Bursa Malaysia and the return of the optimal portfolio is compared between the two stochastic models. Results show that the two stage model outperforms the single stage model for the optimal and in-sample analysis

A Nonlinear Lagrange Algorithm for Stochastic Minimax Problems Based on Sample Average Approximation Method

An implementable nonlinear Lagrange algorithm for stochastic minimax problems is presented based on sample average approximation method in this paper, in which the second step minimizes a nonlinear Lagrange function with sample average approximation functions of original functions and the sample average approximation of the Lagrange multiplier is adopted. Under a set of mild assumptions, it is proven that the sequences of solution and multiplier obtained by the proposed algorithm converge to the Kuhn-Tucker pair of the original problem with probability one as the sample size increases. At last, the numerical experiments for five test examples are performed and the numerical results indicate that the algorithm is promising

Adjustable Regret for Continuous Control of Conservatism and Competitive Ratio Analysis

A major issue of the increasingly popular robust optimization is the tendency to produce overly conservative solutions. This paper proposes a new parameterized robust criterion to offer smooth control of conservatism without tampering with the uncertainty set. Unlike many other intractable criteria, its tractability is attained for common types of linear problems by reformulating them into traditional linear robust optimization problems. Many properties of it are studied to help analyze multistage robust optimization problems for closed-form solutions and give rise to a new approach to competitive ratio analysis. Finally, the new criterion is applied to the well-studied robust one-way trading problem to demonstrate its potential. A closed-form solution is obtained, which not only facilitates a numerical study of its smooth control of conservatism, but leads to a much simpler competitive ratio analysis.Comment: 29 pages, 2 figure

Robust Modeling Framework for Transportation Infrastructure System Protection Under Uncertainty

This dissertation presents a modelling framework that will be useful for decision makers at federal and state levels to establish efficient resource allocation schemes to transportation infrastructures on both strategic and tactical levels. In particular, at the upper level, the highway road network carries traffic flows that rely on the performance of individual bridge infrastructure which is optimized through robust design at lower level. A system optimization model is developed to allocate resources to infrastructure systems considering traffic impact, which aims to reduce infrastructure rehabilitation cost, long term economic cost including travel delays due to realization of future natural disasters such as earthquakes. At the lower level, robust design for each individual bridge is confined by the resources allocated from upper level network optimization model, where optimal rehabilitation strategies are selected to improve its resiliency to hedge against potential disasters. The above two decision making processes are interdependent, thus should not be treated separately. Thus, the resultant modeling framework will be a step forward in the disaster management for transportation infrastructure network. This dissertation first presents a novel formulation and a solution algorithm of network level resource allocation problem. A mean-risk two-stage stochastic programming model is developed with the first-stage considering resources allocation and second-stages shows the response from system travel delays, where the conditional value-at-risk (CVaR) is specified as the risk measure. A decomposition method based on generalized Benders decomposition is developed to solve the model, with a concerted effort on overcoming the algorithmic challenges imbedded in non-convexity, nonlinearity and non-separability of first- and second- stage variables. The network level model focusing on traffic optimization is further integrated into a bi-level modeling framework. For lower level, a method using finite element analysis to generate a nonlinear relationship between structural performances of bridges and retrofit levels. This relationship was converted to traffic capacity-cost relationship and used as an input for the upper-level model. Results from the Sioux Falls transportation network demonstrated that the integration of both network and FE modeling for individual structure enhanced the effectiveness of retrofit strategies, compared to linear traffic capacity-cost estimation and conventional engineering practice which prioritizes bridges according to the severity of expected damages of bridges. This dissertation also presents a minimax regret formulation of network protection problem that is integrated with earthquake simulations. The lower level model incorporates a seismic analysis component into the framework such that bridge columns are subject to a set of ground motions. Results of seismic response of bridge structures are used to develop a Pareto front of cost-safety-robustness relationship from which bridge damage scenarios are generated as an input of the network level model

05031 Abstracts Collection -- Algorithms for Optimization with Incomplete Information

From 16.01.05 to 21.01.05, the Dagstuhl Seminar 05031 ``Algorithms for Optimization with Incomplete Information\u27\u27 was held in the International Conference and Research Center (IBFI), Schloss Dagstuhl. During the seminar, several participants presented their current research, and ongoing work and open problems were discussed. Abstracts of the presentations given during the seminar as well as abstracts of seminar results and ideas are put together in this paper. The first section describes the seminar topics and goals in general. Links to extended abstracts or full papers are provided, if available

Heuristic algorithms in optimization

Práce se zabývá určením pravděpodobnostních rozdělení pro stochastické programování, při kterém jsou optimální hodnoty účelové funkce extrémní (minimální nebo maximální). Rozdělení se určuje pomocí heuristických metod, konkrétně pomocí genetických algoritmů, kde celá populace aproximuje hledané rozdělení. První kapitoly popisují obecně matematické a stochastické programování a dále jsou popsány různé heuristické metody a s důrazem na genetické algoritmy. Těžiště práce je v naprogramování daného algoritmu a otestování na úlohách lineárních a kvadratických stochastických modelů.The thesis deals with stochastic programming and determining probability distributions which cause extreme optimal values (maximal or minimal) of an objective function. The probability distribution is determined by heuristic method, especially by genetic algorithms, where whole population approximates desired distribution. The first parts of the thesis describe mathematical and stochastic programming in general and also there are described various heuristic methods with emphasis on genetic algorithms. The goal of the diploma thesis is to create a program which tests the algorithm on linear and quadratic stochastic models.