Bellman Equation - Solution Methods

Solution Methods

• The method of undetermined coefficients, also known as 'guess and verify', can be used to solve some infinite-horizon, autonomous Bellman equations.

• The Bellman equation can be solved by backwards induction, either analytically in a few special cases, or numerically on a computer. Numerical backwards induction is applicable to a wide variety of problems, but may be infeasible when there are many state variables, due to the curse of dimensionality. Approximate dynamic programming has been introduced by D. P. Bertsekas and J. N. Tsitsiklis with the use of artificial neural networks (multilayer perceptrons) for approximating the Bellman function. This is an effective mitigation strategy for reducing the impact of dimensionality by replacing the memorization of the complete function mapping for the whole space domain with the memorization of the sole neural network parameters.

• By calculating the first-order conditions associated with the Bellman equation, and then using the envelope theorem to eliminate the derivatives of the value function, it is possible to obtain a system of difference equations or differential equations called the 'Euler equations'. Standard techniques for the solution of difference or differential equations can then be used to calculate the dynamics of the state variables and the control variables of the optimization problem.