Environmental management and restoration under unified risk and uncertainty using robustified dynamic Orlicz risk

Abstract

Environmental management and restoration should be designed such that the risk and uncertainty owing to nonlinear stochastic systems can be successfully addressed. We apply the robustified dynamic Orlicz risk to the modeling and analysis of environmental management and restoration to consider both the risk and uncertainty within a unified theory. We focus on the control of a jump-driven hybrid stochastic system that represents macrophyte dynamics. The dynamic programming equation based on the Orlicz risk is first obtained heuristically, from which the associated Hamilton-Jacobi-Bellman (HJB) equation is derived. In the proposed Orlicz risk, the risk aversion of the decision-maker is represented by a power coefficient that resembles a certainty equivalence, whereas the uncertainty aversion is represented by the Kullback-Leibler divergence, in which the risk and uncertainty are handled consistently and separately. The HJB equation includes a new state-dependent discount factor that arises from the uncertainty aversion, which leads to a unique, nonlinear, and nonlocal term. The link between the proposed and classical stochastic control problems is discussed with a focus on control-dependent discount rates. We propose a finite difference method for computing the HJB equation. Finally, the proposed model is applied to an optimal harvesting problem for macrophytes in a brackish lake that contains both growing and drifting populations.