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Use of risk premiums in chance‐constrained dynamic programing
Author(s) -
Askew Arthur J.
Publication year - 1975
Publication title -
water resources research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.863
H-Index - 217
eISSN - 1944-7973
pISSN - 0043-1397
DOI - 10.1029/wr011i006p00862
Subject(s) - dynamic programming , order (exchange) , mathematical optimization , limit (mathematics) , failure rate , stochastic programming , computer science , resource (disambiguation) , econometrics , actuarial science , economics , mathematics , finance , statistics , mathematical analysis , computer network
Stochastic dynamic programing offers a powerful means of deriving optimum operating policies for water resource systems. In order to limit the probability of system failure associated with such policies it is necessary to amend the standard algorithm and use some form of chance‐constrained dynamic programing. This technique may involve an iterative search based on variations in such parameters as the penalty for failure or the discount rate. Use of the latter parameter is found to be quite feasible and is analogous to the imposition of risk premiums when one is investing in less secure ventures: the greater the probability of failure, the greater the premium demanded.