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From Data to Decisions: Distributionally Robust Optimization Is Optimal

Author

Listed:
  • Bart P. G. Van Parys

    (Operations Research Center, Massachusetts Institute of Technology, Cambridge, Massachusetts 02139)

  • Peyman Mohajerin Esfahani

    (Delft Center for Systems and Control, Technische Universiteit Delft, 2628 CD Delft, Netherlands)

  • Daniel Kuhn

    (Risk Analytics and Optimization Chair, Ecole Polytechnique Fédérale de Lausanne, CH-1015 Lausanne, Switzerland)

Abstract

We study stochastic programs where the decision maker cannot observe the distribution of the exogenous uncertainties but has access to a finite set of independent samples from this distribution. In this setting, the goal is to find a procedure that transforms the data to an estimate of the expected cost function under the unknown data-generating distribution, that is, a predictor , and an optimizer of the estimated cost function that serves as a near-optimal candidate decision, that is, a prescriptor . As functions of the data, predictors and prescriptors constitute statistical estimators. We propose a meta-optimization problem to find the least conservative predictors and prescriptors subject to constraints on their out-of-sample disappointment. The out-of-sample disappointment quantifies the probability that the actual expected cost of the candidate decision under the unknown true distribution exceeds its predicted cost. Leveraging tools from large deviations theory, we prove that this meta-optimization problem admits a unique solution: The best predictor-prescriptor-pair is obtained by solving a distributionally robust optimization problem over all distributions within a given relative entropy distance from the empirical distribution of the data.

Suggested Citation

  • Bart P. G. Van Parys & Peyman Mohajerin Esfahani & Daniel Kuhn, 2021. "From Data to Decisions: Distributionally Robust Optimization Is Optimal," Management Science, INFORMS, vol. 67(6), pages 3387-3402, June.
    • Handle: RePEc:inm:ormnsc:v:67:y:2021:i:6:p:3387-3402
    DOI: 10.1287/mnsc.2020.3678
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    References listed on IDEAS

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