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Title : Estimation Effects in Large-scale Optimization
Date : May 3, 2008
Speaker : John Birge, Levin Professor of Operations Management
Affiliation : University of Chicago Graduate School of Business
Abstract
Increases in computational efficiency lead to the ability to solve ever larger optimization models, but these larger models then require estimation of ever more parameters. In many cases, such as portfolio optimization, the number of these estimates may grow at a greater than linear rate in the number of variables. The result is that the probability of one of more extremely biased estimate within the entire set of estimates may increase rapidly in problem size.
Optimization of models with these highly biased estimates may then yield solutions that are far from a true optimum and may even be worse than following simple rules of thumb or vastly simplified models. This talk will describe a model of the effects of estimation errors in optimization models using portfolio optimization and tracking as an example. We will discuss various alternatives for addressing this issue, such as increased sampling, Bayesian views, robust optimization, re-sampling or batching, and model reduction.
Biosketch
John R. Birge studies mathematical modeling of systems under uncertainty, especially for maximizing operational and financial goals using the methodologies of stochastic programming and large-scale optimization. His research has been supported by the National Science Foundation, the Ford Motor Company, General Motors Corporation, the National Institute of Justice, the Office of Naval Research, the Electric Power Research Institute, and Volkswagen of America. He has published widely and is the recipient of the Best Paper Award from the Japan Society for Industrial and Applied Mathematics, the Institute for Operations Research and the Management Sciences Fellows Award, and the Institute of Industrial Engineers Medallion Award. A former dean of the Robert R. McCormick School of Engineering and Applied Sciences at Northwestern University, he has worked as a consultant for a variety of firms including the University of Michigan Hospitals, Deutsche Bank, Allstate Insurance Company, and Morgan Stanley, and he uses cases from these experiences in his teaching.
Birge earned a bachelor's degree in mathematics from Princeton University in 1977 and a master's degree and a PhD in operations research from Stanford University in 1979 and 1980, respectively. He joined the GSB faculty in 2004. He is a member of the Institute for Operations Research and the Management Sciences, the Mathematical Programming Society, the Mathematical Association of America, and Sigma Xi. He also speaks French, Russian, German, and English.
