Encyclopedia of Operations Research and Management Science

2013 Edition
| Editors: Saul I. Gass, Michael C. Fu

Optimal Stopping

Reference work entry
DOI: https://doi.org/10.1007/978-1-4419-1153-7_200550

Sequential decision-making problem under uncertainty in which a decision maker must decide when to stop observing a stochastic process, with the usual objective being to maximize a terminal reward (or minimize cost). Many practical OR/MS applications can be formulated as optimal stopping problems. A well-known example is the so-called secretary problem, in which an employer interviews potential candidates in succession and must decide when to stop the interviewing process and select one to hire. In finance, the pricing of American options is a well-known class of optimal stopping problems. In discrete time, optimal stopping problems can be formulated as Markov decision problems, in principle solvable by dynamic programming.

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© Springer Science+Business Media New York 2013