From Wikipedia, the free encyclopedia

Stochastic programming is a framework for modeling optimization problems that involve uncertainty. Whereas deterministic optimization problems are formulated with known parameters, real world problems almost invariably include some unknown parameters. When the parameters are known only within certain bounds, one approach to tackling such problems is called robust optimization. Here the goal is to find a solution which is feasible for all such data and optimal in some sense. Stochastic programming models are similar in style but take advantage of the fact that probability distributions governing the data are known or can be estimated. The goal here is to find some policy that is feasible for all (or almost all) the possible data instances and maximizes the expectation of some function of the decisions and the random variables. More generally, such models are formulated, solved analytically or numerically, and analyzed in order to provide useful information to a decision-maker.

The most widely applied and studied stochastic programming models are two-stage linear programs. Here the decision maker takes some action in the first stage, after which a random event occurs affecting the outcome of the first-stage decision. A recourse decision can then be made in the second stage that compensates for any bad effects that might have been experienced as a result of the first-stage decision. The optimal policy from such a model is a single first-stage policy and a collection of recourse decisions (a decision rule) defining which second-stage action should be taken in response to each random outcome.

Stochastic dynamic programming is frequently used to model animal behaviour in such fields as behavioural ecology^[1][2]. Empirical tests of models of optimal foraging, life-history transitions such as fledging in birds and egg laying in parasitoid wasps have shown the value of this modelling technique in explaining the evolution of behavioural decision making. These models are typically many staged, rather than two-staged.

Stochastic dynamic programming is a useful tool in understanding decision making under uncertainty. The accumulation of capital stock under uncertainty is one example, often it is used by resource economists to analyze bioeconomic problems^[3]where the uncertainty enters in as weather, etc.

1. ^ Mangel, M. & Clark, C. W. 1988. Dynamic modeling in behavioral ecology. Princeton University Press ISBN 0-691-08506-4
2. ^ Houston, A. I & McNamara, J. M. 1999. Models of adaptive behaviour: an approach based on state. Cambridge University Press ISBN 0-521-65539-0
3. ^ Howitt, R., Msangi, S., Reynaud, A and K. Knapp. 2002. "Using Polynomial Approximations to Solve Stochastic Dynamic Programming Problems: or A "Betty Crocker " Approach to SDP." University of California, Davis, Department of Agricultural and Resource Economics Working Paper. http://www.agecon.ucdavis.edu/aredepart/facultydocs/Howitt/Polyapprox3a.pdf

Stochastic Programming Community Home Page.