New Formulations for Optimization under Stochastic Dominance Constraints

Stochastic dominance constraints allow a decision-maker to manage risk in an optimization setting by requiring their decision to yield a random outcome which stochastically dominates a reference random outcome. We present new integer and linear programming formulations for optimization under first and second-order stochastic dominance constraints, respectively. These formulations are more compact than existing formulations, and relaxing integrality in the first-order formulation yields a second-order formulation, demonstrating the tightness of this formulation. We also present a specialized branching strategy and heuristics which can be used with the new first-order formulation. Computational tests illustrate the potential benefits of the new formulations.

• Type: Journal
• Year: 2008
• Where: SIAMJO
• Authors: James Luedtke
• Keywords: First-order Formulation, Random Outcome, SIAMJO 2008, Stochastic Dominance