Adaption of option pricing algorithm to real time decision optimization in the face of emerging natural hazards

The present paper proposes an approach for the optimization of real time decision problems in the face of emerging natural hazards. It takes basis in the Least Squares Monte Carlo method (the LSM method) originally developed for option pricing in financial mathematics. In the present paper, first the decision problems considered in the paper are described. Then, the fundamental idea underlying the LSM method is introduced. Thereafter, extensions are presented, which are required for the application to the real time decision problems in consideration. The application of the LSM method and these extensions constitute the proposed approach. The performance of the proposed approach is investigated with an example; decision in regard to shut-down of the operation of a platform in the event of an approaching typhoon. The numerical result shows clear advantages of the proposed approach. Finally, possible applications to other engineering decision problems of pre-posterior type are briefly discussed.