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Stochastic Optimization and Worst-case Decisions

In: Cooperative Systems

Author

Listed:
  • Nalan Gülpinar

    (Imperial College London)

  • Berç Rustem

    (Imperial College London)

  • Stanislav Žaković

    (Imperial College London)

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.

Suggested Citation

  • Nalan Gülpinar & Berç Rustem & Stanislav Žaković, 2007. "Stochastic Optimization and Worst-case Decisions," Lecture Notes in Economics and Mathematical Systems, in: Don Grundel & Robert Murphey & Panos Pardalos & Oleg Prokopyev (ed.), Cooperative Systems, pages 317-338, Springer.
    • Handle: RePEc:spr:lnechp:978-3-540-48271-0_19
    DOI: 10.1007/978-3-540-48271-0_19
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    Cited by:

    1. Nalan Gülpınar & Kabir Katata & Dessislava A Pachamanova, 2011. "Robust portfolio allocation under discrete asset choice constraints," Journal of Asset Management, Palgrave Macmillan, vol. 12(1), pages 67-83, April.

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