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What are Sequential Investment Decisions?
The payback method, certainty equivalent method, and scenario analysis help investors to find one simple solution for investment analysis. However, for businesses, it is important that they keep making decisions one after another depending on the market conditions. That is, it is wrong to believe that only one analysis is enough and the end of the decision-making process. In fact, one decision leads to a sequence of other decisions and the process goes on in a manner in which decisions have to be taken one after another. Such a continuous decision-making process is known as sequential investment decisions.
Why sequential investment decisions are required?
As the business starts its operation, it has to go through a lot of scenarios in which it needs to take individual decisions for each requirement arising at different moments. For example, a business has to make the profit and loss calculations every year and the next year’s account is related to the current year’s account. In the same manner, decisions keep arising one after another that needs to be addressed to continue with the investment processes. This helps businesses to grow and keep running without a sudden negative impact on the investments.
It is important to realize that investments are not isolated decisions but a part of a sequence of events. That is why, they need to be analyzed one after another.
Sequential decisions, therefore, take care of all probable business decisions that may arise in due course of time from the present to the future.
Sequential investments are related more to the sequence of events that arise in due course of time due to business needs than the profitability of an investment made at a certain time. Therefore, it is a natural progress of an event rather than a process of deriving profit out of the events.
How are the sequential investments represented?
Sequential investments are represented by decision trees that are like branches of trees representing the result of each decision and leading to the next decision when one choice is accepted.
A decision tree is an interconnected representation of all possible events connected to one another and happening one after another in a natural manner.
Decision trees rely on the probability to find the probable result of the investment decisions.
Although decision trees are a good way to represent investment decisions, they are not free from aberrations, as future events are included in the process. As is obvious, probability cannot derive the complete fact or truth of an investment decision that will affect future events. Hence, the utility of decisions trees is limited and uncertain to a certain extent.
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