Motivation
Every stochastic program is, in practice, compared against a shortcut. A decision maker
facing genuine uncertainty is tempted either to replace the random data by its mean and solve
one deterministic problem, or to imagine that perfect information about the future were
available and solve a separate deterministic problem per scenario. Both temptations have
precise answers: the expected value of perfect information (EVPI) measures how much a
decision maker should be willing to pay for a perfect forecast, and the value of the
stochastic solution (VSS) measures the cost of ignoring uncertainty altogether by solving the
mean-value problem. Both concepts originate in decision analysis — EVPI traces to Raiffa and
Schlaifer (1961) — and were brought into stochastic programming by Madansky (1960), who proved
the first chain of inequalities relating the wait-and-see value, the recourse value and the
expected-value-solution's cost. Birge and Louveaux, Introduction to Stochastic Programming,
2nd ed. (Springer, 2011), Chapter 4, gives the standard modern treatment, including a refined
family of bounds — built from pairs subproblems against a chosen reference scenario — that
sharpen VSS beyond the original mean-scenario comparison. This mission formalizes that chapter's
capstone: the five-quantity, four-inequality chain that pins VSS between two computable optimal
values.
Setting
Fix a two-stage stochastic program with fixed recourse: a finite family of K scenarios
ξ1,…,ξK in Rd, each occurring with probability pk≥0,
∑kpk=1; a first-stage feasible set K1⊆Rn1; and, for every
first-stage decision x∈Rn1 and every scenario ξ∈Rd, a
scenario cost z(x,ξ) — the optimal value of cTx+min{qTy∣Wy=h(ξ)−Tx, y≥0}. By convention z(x,ξ)=+∞ when x has no feasible second-stage recourse under
ξ, and z(x,ξ)=−∞ when the second-stage program is unbounded below.
From z, five basic quantities are defined (Birge & Louveaux §4.1–§4.2):
- The recourse problem's value, RP=minx∈K1Eξz(x,ξ) — the
best a decision maker can do without foreknowledge of ξ (the "here-and-now" solution).
- The wait-and-see value, WS=Eξ[minx∈K1z(x,ξ)] — the
average cost if ξ were revealed before choosing x.
- The expected value of perfect information, EVPI=RP−WS.
- The expected value problem's solution xˉ(ξˉ), optimal for the deterministic
problem at the mean scenario ξˉ=E(ξ); its recourse cost, the expected
result of using the EV solution, is EEV=Eξz(xˉ(ξˉ),ξ).
- The value of the stochastic solution, VSS=EEV−RP — the extra cost of implementing
the mean-scenario decision instead of solving the recourse problem.
Section 4.6 refines VSS by replacing the mean scenario with an arbitrary reference scenario
ξr (not necessarily one of the K possible scenarios, e.g. a worst case), with assumed
probability pr=P(ξ=ξr):
- xˉr, optimal for minx∈K1z(x,ξr), gives the expected value of the
reference-scenario solution, EVRS=Eξz(xˉr,ξ), and the generalized
VSS=EVRS−RP.
- For each scenario ξk, the pairs subproblem of ξr and ξk treats them as a
two-point distribution with weights pr and 1−pr: its optimal value is
minx∈K1[prz(x,ξr)+(1−pr)z(x,ξk)], attained at some
xˉk. Averaging these optimal values over k (rescaled by 1/(1−pr)) gives the
sum of pairs expected values, SPEV. Taking, instead, the smallest full expected cost
Eξz(xˉk,ξ) among the K+1 candidate solutions {xˉ1,…,xˉK,xˉr} gives the expectation of pairs expected value, EPEV.
Formalization targets
Goal — Chapter 4, Theorem 9 (p. 174)
0≤EVRS−EPEV≤VSS≤EVRS−SPEV≤EVRS−WS.
Four links, each with independent content: nonnegativity of the leftmost gap, then two genuine
inequalities (from the pairs-subproblem comparisons of Propositions 7 and 8), then the identity
VSS=EVRS−RP folded against RP≥WS's reverse-direction cousin. This is the weakest
statement that keeps all five quantities distinct — stating only the outer bound
0≤VSS≤EVRS−WS would erase exactly the refinement (via pairs subproblems) that makes
the chapter's method useful.
Supporting propositions (milestones, in attack order)
- Proposition 1 (p. 166): WS≤RP≤EEV.
- Proposition 5(a) (pp. 167–168): 0≤EVPI and 0≤VSS (mean-scenario form), for
any stochastic program.
- Proposition 7 (p. 173): WS≤SPEV≤RP.
- Proposition 8 (p. 174): RP≤EPEV≤EVRS.
Significance
The chain gives a decision maker two computable, non-obvious bounds on VSS — a quantity that is
otherwise expensive to pin down exactly, since RP itself already requires solving the full
recourse problem. EVRS−EPEV and EVRS−SPEV are both computable from K+1 (or K)
two-scenario LPs, far cheaper than the full K-scenario recourse problem, so Theorem 9 turns an
expensive exact quantity into a pair of cheap certified bounds. Formalizing it fixes, once and
for all, the exact hypotheses and quantifier structure of Madansky's original inequality
(Proposition 1) together with the later pairs-subproblem refinement (Propositions 6–8, Birge
1982), often cited informally as "the VSS bounds" without distinguishing EEV, EVRS, EPEV
and SPEV. No part of this chain is on Mathlib or Formalpedia today (checked by concept query,
not title); this is a first, from-scratch treatment of two-stage recourse value-of-information
theory as formal objects.
Difficulty
The obvious first idea — collapse RP, WS, EV, EEV, EVRS, EPEV, SPEV to one
"the optimal value of the LP" and prove a single inequality — throws away the entire content of
the chapter. Each quantity restricts the minimization to a different feasible object: RP
minimizes jointly over x; WS swaps the order of min and E; EEV/EVRS evaluate
one fixed x under every scenario; SPEV and EPEV each minimize over a family of pairs
subproblems rather than the full K-scenario problem. The chain's proof (Propositions 7–8)
depends on this precisely: Proposition 7's lower bound uses that each pairs-subproblem-optimal
(xˉk,yˉk) is feasible (not necessarily optimal) for the single-scenario problem at
ξr, and its upper bound uses that the recourse-optimal (x∗,y∗(ξr),y∗(ξk)) is
feasible (not necessarily optimal) for the pairs subproblem — a feasible-but-not-optimal
argument in each direction, not a direct comparison of objective values. Losing track of which
solution is fixed and which is optimized destroys the argument entirely.
Formalization scope
An Instance bundles the finite scenario set (Fin K, probabilities p : Fin K → ℝ with
p ≥ 0, ∑ p = 1, scenarios xi : Fin K → (Fin d → ℝ)), the first-stage feasible set
K1 : Set (Fin n1 → ℝ), and the scenario cost z : (Fin n1 → ℝ) → (Fin d → ℝ) → EReal, using
the extended reals to carry the book's own +∞/−∞ conventions for infeasibility and
unboundedness rather than silently restricting to a finite-valued special case (a genuine risk
of trivialization here, since Example 2 of the chapter exhibits EEV=+∞). All optimal
values (RP, WS, EV, EVPI, EEV, VSS, EVRS, generalized VSS, SPEV, EPEV) are
defined directly from z, matching the book's own level of abstraction in this chapter (which
never unfolds z into the underlying LP's A,b,c,q,W,T,h data — those appear only in Chapter
3). Because EEV, the mean-scenario VSS, EVRS, the generalized VSS, and EPEV are each
defined relative to an optimal solution of some sub-problem — the book itself only ever says
"let xˉ(ξˉ) denote some optimal solution" — every theorem using them states that
solution and its optimality as explicit hypotheses (x ∈ K1 and z x … = ⨅ …), never baking it
into a Classical.choiced value; this keeps the quantifier structure faithful to the book's own
"let ... be an optimal solution" phrasing. Proposition 5's part (b) — the upper bound
EVPI≤EEV−EV, VSS≤EEV−EV "for stochastic programs with fixed recourse matrix and
fixed objective coefficients" — needs a different scope: that hypothesis is a structural
property of the underlying LP data (W, c, q fixed across scenarios) invisible once z is
abstracted away as above, and pinning it down would require modeling the LP's A,b,c,q,W,T,h(ξ)
data explicitly (as Chapter 3's mission does for its convexity theorem). That part is out of
scope here and is not needed for Theorem 9's own chain, which rests only on Proposition 5(a).
Collapsing any two of RP, WS, EV, EEV, EVRS, EPEV, SPEV to a single "value of the
LP" — the trivialization this book-wide series flags for Chapter 4 — is ruled out by
construction: each is its own definition over its own feasible object, and Theorem 9's statement
names all five quantities in the chain rather than only its outer bound. The two occurrences of
"VSS" in the chapter (the original mean-scenario EEV−RP of §4.2, and the reference-scenario
EVRS−RP generalization of §4.6, used only in Theorem 9) are likewise kept as two distinct
definitions rather than conflated under one name.
Every addition and subtraction between EReal values in this mission — inside expect, WS,
EVPI, VSS, EVRS's appearance in VSSRef, the pair sum inside pairsValue, the sum inside
SPEV, and all four differences in Theorem 9's own chain — uses three explicit operations,
badd/bsub/bsum, that implement the book's own convention (p. 164) that +∞ (infeasibility)
dominates, i.e. (+∞)+(−∞)=+∞, rather than Mathlib's native EReal addition, whose
⊤+⊥=⊥ would make VSS ≥ 0 (Proposition 5(a)) and the goal's own leftmost inequality false
whenever a witness solution is infeasible in a positive-probability scenario — exactly the
situation of the book's own Example 2 (pp. 174-175). The reference scenario's probability
pr=Pr(ξ=ξr) (p. 172) is likewise not a free parameter but a definition, refProb,
computed from the instance itself as ∑k:ξk=ξrpk; SPEV's sum is correspondingly
restricted to the scenarios other than the reference scenario (ξk=ξr), matching the
book's own proof of Proposition 7, which uses ∑k=rpk=1−pr. The single hypothesis
refProb I xir < 1 on Propositions 7, 8 and the goal says that some other scenario remains
possible, which the book's own (1−pr)−1 factor presupposes.
Reusable beyond this mission: the Instance definition and the RP/WS/EV quantities are
the natural base for any later chapter of this series that needs the two-stage recourse value
(e.g. Chapter 3's convexity mission, Chapter 5's L-shaped method); contributions extending this
Instance to the full LP data of the underlying two-stage program, or adding Proposition 5(b)
and Proposition 2's Jensen-inequality argument on top of it, are welcome.
Selected references
- J.R. Birge and F. Louveaux, Introduction to Stochastic Programming, 2nd ed., Springer Series
in Operations Research and Financial Engineering, 2011, Chapter 4.
DOI: 10.1007/978-1-4614-0237-4
- A. Madansky, "Inequalities for Stochastic Linear Programming Problems", Management Science
6(2), 1960, 197–204.
- H. Raiffa and R. Schlaifer, Applied Statistical Decision Theory, Harvard Business School,
1961.
- J.R. Birge, "The Value of the Stochastic Solution in Stochastic Linear Programs with Fixed
Recourse", Mathematical Programming 24(1), 1982, 314–325.