Two-stage stochastic programming with imperfect information update: Value evaluation and information acquisition game

Abstract

We focus on the two-stage stochastic programming (SP) with information update, and study how to evaluate and acquire information, especially when the information is imperfect. The scarce-data setting in which the probabilistic interdependent relationship within the updating process is unavailable, and thus, the classic Bayes' theorem is inapplicable. To address this issue, a robust approach is proposed to identify the worst probabilistic relationship of information update within the two-stage SP, and the robust Expected Value of Imperfect Information (EVII) is evaluated by developing a scenario-based max-min-min model with the bi-level structure. Three ways are developed to find the optimal solution for different settings. Furthermore, we study a costly information acquisition game between a two-stage SP decision-maker and an exogenous information provider. A linear compensation contract is designed to realize the global optimum. Finally, the proposed approach is applied to address a two-stage production and shipment problem to validate the effectiveness of our work. This paper enriches the interactions between uncertain optimization and information management and enables decision-makers to evaluate and manage imperfect information in a scarce-data setting.

Keywords

• two-stage stochastic programming
• robust optimization
• expected value of imperfect information
• costly information acquisition game
• two-stage production and shipment