Comparing stage-scenario with nodal formulation for multistage stochastic problems

Abstract

To solve real life problems under uncertainty in Economics, Finance, Energy, Transportation and Logistics, the use of stochastic optimization is widely accepted and appreciated. However, the nature of stochastic programming leads to a conflict between adaptability to reality and tractability. To formulate a multistage stochastic model, two types of formulations are typically adopted: the so-called stage-scenario formulation named also formulation with explicit non-anticipativity constraints and the so-called nodal formulation named also formulation with implicit non-anticipativity constraints. Both of them have advantages and disadvantages. This work aims at helping the scholars and practitioners to understand the two types of notation and, in particular, to reformulate with the nodal formulation a model that was originally defined with the stage-scenario formulation presenting this implementation in the algebraic language GAMS. In addition, this work presents an empirical analysis applying the two formulations both without any further decomposition to perform a fair comparison. In this way, we show that the difficulties to implement the model with the nodal formulation are somehow reworded making the problem tractable without any decomposition algorithm. Still, we remark that in some other applications the stage-scenario formulation could be more helpful to understand the structure of the problem since it allows to relax the non-anticipativity constraints.