Stochastic Linear Bandits with Latent Heterogeneity

Abstract: This paper addresses the critical challenge of latent heterogeneity in online decision-making, where individual responses to business actions vary due to unobserved characteristics. While existing approaches in data-driven decision-making have focused on observable heterogeneity through contextual features, they fall short when heterogeneity stems from unobservable factors such as lifestyle preferences and personal experiences. We propose a novel latent heterogeneous bandit framework that explicitly models this unobserved heterogeneity in customer responses, with promotion targeting as our primary example. Our methodology introduces an innovative algorithm that simultaneously learns latent group memberships and group-specific reward functions. Through theoretical analysis and empirical validation using data from a mobile commerce platform, we establish high-probability bounds for parameter estimation, convergence rates for group classification, and comprehensive regret bounds. Notably, our theoretical analysis reveals two distinct types of regret measures: a strong regret'' against an oracle with perfect knowledge of customer memberships, which remains non-sub-linear due to inherent classification uncertainty, and aregular regret'' against an oracle aware only of deterministic components, for which our algorithm achieves a sub-linear rate that is minimax optimal in horizon length and dimension. We further demonstrate that existing bandit algorithms ignoring latent heterogeneity incur constant average regret that accumulates linearly over time. Our framework provides practitioners with new tools for decision-making under latent heterogeneity and extends to various business applications, including personalized pricing, resource allocation, and inventory management.