Stochastic Optimization and Worst-case Decisions

Nalan Gülpinar (), Berç Rustem () and Stanislav Žaković ()
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Nalan Gülpinar: Imperial College London
Berç Rustem: Imperial College London
Stanislav Žaković: Imperial College London

A chapter in Cooperative Systems, 2007, pp 317-338 from Springer

Abstract: Summary In this chapter, we are concerned with decision making methods for dynamic systems under uncertainty. We consider expected value optimization of stochastic systems and worst-case robust strategies. Stochastic decision-making involves uncertainty and consequently risk. An important tool to address the inherent error for forecasting uncertainty is worst-case analysis. From the risk management point of view, minimax yields the best strategy determined simultaneously with the worst state of the underlying system. Worst-case analysis is a robust framework for decisions under uncertainty as the actual performance of the decision has a noninferiority property. The significance of robust strategies is increasingly recognized as attitudes towards risk evolve in diverse areas. We present worst-case approach to macroeconomics policy making and financial portfolio management.

Keywords: Stochastic Optimization; Scenario Tree; Uncertain Variable; Investment Horizon; Minimax Problem (search for similar items in EconPapers)
Date: 2007
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Persistent link: https://EconPapers.repec.org/RePEc:spr:lnechp:978-3-540-48271-0_19

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DOI: 10.1007/978-3-540-48271-0_19

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