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In this paper, we consider a multistage expected utility maximization problem where the decision makers utility function at each stage depends on historical data and the information on the true utility function is incomplete. To mitigate the risk arising from ambiguity of the true utility, we propose a maximin robust model where the optimal policy is based on the worst sequence of utility functions from an ambiguity set constructed with partially available information about the decision makers preferences. We then show that the multistage maximin problem is time consistent when the utility functions are state-dependent and demonstrate with a counter example that the time consistency may not be retained when the utility functions are state-independent. With the time consistency, we show the maximin problem can be solved by a recursive formula whereby a one-stage maximin problem is solved at each stage beginning from the last stage. Moreover, we propose two approaches to construct the ambiguity set: a pairwise comparison approach and a $zeta$-ball approach where a ball of utility functions centered at a nominal utility function under $zeta$-metric is considered. To overcome the difficulty arising from solving the infinite dimensional optimization problem in computation of the worst-case expected utility value, we propose piecewise linear approximation of the utility functions and derive error bound for the approximation under moderate conditions. Finally we develop a scenario tree-based computational scheme for solving the multistage preference robust optimization model and report some preliminary numerical results.
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In behavioural economics, a decision makers preferences are expressed by choice functions. Preference robust optimization (PRO) is concerned with problems where the decision makers preferences are ambiguous, and the optimal decision is based on a robust choice function with respect to a preference ambiguity set. In this paper, we propose a PRO model to support choice functions that are: (i) monotonic (prefer more to less), (ii) quasi-concave (prefer diversification), and (iii) multi-attribute (have multiple objectives/criteria). As our main result, we show that the robust choice function can be constructed efficiently by solving a sequence of linear programming problems. Then, the robust choice function can be optimized efficiently by solving a sequence of convex optimization problems. Our numerical experiments for the portfolio optimization and capital allocation problems show that our method is practical and scalable.
In many smart infrastructure applications flexibility in achieving sustainability goals can be gained by engaging end-users. However, these users often have heterogeneous preferences that are unknown to the decision-maker tasked with improving operational efficiency. Modeling user interaction as a continuous game between non-cooperative players, we propose a robust parametric utility learning framework that employs constrained feasible generalized least squares estimation with heteroskedastic inference. To improve forecasting performance, we extend the robust utility learning scheme by employing bootstrapping with bagging, bumping, and gradient boosting ensemble methods. Moreover, we estimate the noise covariance which provides approximated correlations between players which we leverage to develop a novel correlated utility learning framework. We apply the proposed methods both to a toy example arising from Bertrand-Nash competition between two firms as well as to data from a social game experiment designed to encourage energy efficient behavior amongst smart building occupants. Using occupant voting data for shared resources such as lighting, we simulate the game defined by the estimated utility functions to demonstrate the performance of the proposed methods.
Benchmarks in the utility function have various interpretations, including performance guarantees and risk constraints in fund contracts and reference levels in cumulative prospect theory. In most literature, benchmarks are a deterministic constant or a fraction of the underlying wealth; as such, the utility is still a univariate function of the wealth. In this paper, we propose a framework of multivariate utility optimization with general benchmark variables, which include stochastic reference levels as typical examples. The utility is state-dependent and the objective is no longer distribution-invariant. We provide the optimal solution(s) and fully investigate the issues of well-posedness, feasibility, finiteness and attainability. The discussion does not require many classic conditions and assumptions, e.g., the Lagrange multiplier always exists. Moreover, several surprising phenomena and technical difficulties may appear: (i) non-uniqueness of the optimal solutions, (ii) various reasons for non-existence of the Lagrangian multiplier and corresponding results on the optimal solution, (iii) measurability issues of the concavification of a multivariate utility and the selection of the optimal solutions, and (iv) existence of an optimal solution not decreasing with respect to the pricing kernel. These issues are thoroughly addressed, rigorously proved, completely summarized and insightfully visualized. As an application, the framework is adopted to model and solve a constraint utility optimization problem with state-dependent performance and risk benchmarks.
We propose kernel distributionally robust optimization (Kernel DRO) using insights from the robust optimization theory and functional analysis. Our method uses reproducing kernel Hilbert spaces (RKHS) to construct a wide range of convex ambiguity sets, which can be generalized to sets based on integral probability metrics and finite-order moment bounds. This perspective unifies multiple existing robust and stochastic optimization methods. We prove a theorem that generalizes the classical duality in the mathematical problem of moments. Enabled by this theorem, we reformulate the maximization with respect to measures in DRO into the dual program that searches for RKHS functions. Using universal RKHSs, the theorem applies to a broad class of loss functions, lifting common limitations such as polynomial losses and knowledge of the Lipschitz constant. We then establish a connection between DRO and stochastic optimization with expectation constraints. Finally, we propose practical algorithms based on both batch convex solvers and stochastic functional gradient, which apply to general optimization and machine learning tasks.
We study multistage distributionally robust mixed-integer programs under endogenous uncertainty, where the probability distribution of stage-wise uncertainty depends on the decisions made in previous stages. We first consider two ambiguity sets defined by decision-dependent bounds on the first and second moments of uncertain parameters and by mean and covariance matrix that exactly match decision-dependent empirical ones, respectively. For both sets, we show that the subproblem in each stage can be recast as a mixed-integer linear program (MILP). Moreover, we extend the general moment-based ambiguity set in (Delage and Ye, 2010) to the multistage decision-dependent setting, and derive mixed-integer semidefinite programming (MISDP) reformulations of stage-wise subproblems. We develop methods for attaining lower and upper bounds of the optimal objective value of the multistage MISDPs, and approximate them using a series of MILPs. We deploy the Stochastic Dual Dynamic integer Programming (SDDiP) method for solving the problem under the three ambiguity sets with risk-neutral or risk-averse objective functions, and conduct numerical studies on multistage facility-location instances having diverse sizes under different parameter and uncertainty settings. Our results show that the SDDiP quickly finds optimal solutions for moderate-sized instances under the first two ambiguity sets, and also finds good approximate bounds for the multistage MISDPs derived under the third ambiguity set. We also demonstrate the efficacy of incorporating decision-dependent distributional ambiguity in multistage decision-making processes.
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