UAMDP: Uncertainty-Aware Markov Decision Process for Risk-Constrained Reinforcement Learning from Probabilistic Forecasts

Michal Koren; Or Peretz; Tai Dinh; Philip S. Yu

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arXiv · 2510.08226

UAMDP: Uncertainty-Aware Markov Decision Process for Risk-Constrained Reinforcement Learning from Probabilistic Forecasts

Michal Koren·Or Peretz·Tai Dinh·Philip S. Yu

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Abstract

Sequential decisions in volatile, high-stakes settings require more than maximizing expected return; they require principled uncertainty management. This paper presents the Uncertainty-Aware Markov Decision Process (UAMDP), a unified framework that couples Bayesian forecasting, posterior-sampling reinforcement learning, and planning under a conditional value-at-risk (CVaR) constraint. In a closed loop, the agent updates its beliefs over latent dynamics, samples plausible futures via Thompson sampling, and optimizes policies subject to preset risk tolerances. We establish regret bounds that converge to the Bayes-optimal benchmark under standard regularity conditions. We evaluate UAMDP in two domains including high-frequency equity trading and retail inventory control, both marked by structural uncertainty and economic volatility. Relative to strong deep learning baselines, UAMDP improves long-horizon forecasting accuracy (RMSE decreases by up to 25% and sMAPE by 32%), and these gains translate into economic performance: the trading Sharpe ratio rises from 1.54 to 1.74 while maximum drawdown is roughly halved. These results show that integrating calibrated probabilistic modeling, exploration aligned with posterior uncertainty, and risk-aware control yields a robust, generalizable approach to safer and more profitable sequential decision-making.

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Michal Koren, Or Peretz, Tai Dinh, Philip S. Yu. 2025-12-18. UAMDP: Uncertainty-Aware Markov Decision Process for Risk-Constrained Reinforcement Learning from Probabilistic Forecasts. https://arxiv.org/abs/2510.08226

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