Bayesian Distributionally Robust Optimization

We introduce a new framework, Bayesian Distributionally Robust Optimization (Bayesian-DRO), for data-driven stochastic optimization where the underlying distribution is unknown. Bayesian-DRO contrasts with most of the existing DRO approaches in the use of Bayesian estimation of the unknown distribution. To make computation of Bayesian updating tractable, Bayesian-DRO first assumes the underlying distribution takes a parametric form with unknown parameter and then computes the posterior distribution of the parameter. To address the model uncertainty brought by the assumed parametric distribution, Bayesian-DRO constructs an ambiguity set of distributions with the assumed parametric distribution as the reference distribution and then optimizes with respect to the worst case in the ambiguity set. We show the strong exponential consistency of the Bayesian posterior distribution and subsequently the convergence of objective functions and optimal solutions of Bayesian-DRO. We also consider several approaches to selecting the ambiguity set size in Bayesian-DRO and compare them numerically. Our numerical results demonstrate the out-of-sample performance of Bayesian-DRO on the news vendor problem of different dimensions and data types.

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