A predictive prescription using minimum volume k-nearest neighbor enclosing ellipsoid and robust optimization

This paper studies the integration of predictive and prescriptive analytics framework for deriving decision from data. Traditionally, in predictive analytics, the purpose is to derive prediction of unknown parameters from data using statistics and machine learning, and in prescriptive analytics, the purpose is to derive a decision from known parameters using optimization technology. These have been studied independently, but the effect of the prediction error in predictive analytics on the decision-making in prescriptive analytics has not been clarified. We propose a modeling framework that integrates machine learning and robust optimization. The proposed algorithm utilizes the k-nearest neighbor model to predict the distribution of uncertain parameters based on the observed auxiliary data. The enclosing minimum volume ellipsoid that contains k-nearest neighbors of is used to form the uncertainty set for the robust optimization formulation. We illustrate the data-driven decision-making framework and our novel robustness notion on a two-stage linear stochastic programming under uncertain parameters. The problem can be reduced to a convex programming, and thus can be solved to optimality very efficiently by the off-the-shelf solvers.