Real options economic control chart for binomial and normal processes

Abstract

AbstractIn this paper, we extend the earlier presented real options control chart (ROCC). In the real options framework, at any given moment, we compare the cost of recalibrating the process with the cost of postponing the (optimal) decision for later. The decision is thus based on cost minimization rather than statistically significant deviations from the in‐control process. We explain the general principles of constructing ROCC for both discrete and continuous processes and the describe the numeric algorithms that allow us to apply these principles to the cases of binomial and Gaussian process. Simulation studies demonstrate that, on average, ROCC runs longer than the standard economic control chart (SECC) and outperforms it in terms of average final costs.