FIN.8:4.2 - Identify information and build the contingent action

Place observations and decisions in their actual order. At each decision use only information then obtainable; future outcomes must remain uncertain where they are not yet revealed. If a test produces an imperfect signal, condition the valuation on that signal and retain the remaining uncertainty. A scenario model that chooses the best action separately in every final state can falsely grant perfect foresight to an earlier decision.

Use operating forecasts and FIN.6’s incremental cash construction to specify the consequence of each available action. FIN.7 can supply an asset value at the decision date; keep its uncertainty and claim definition. The value of an expansion must exclude the exercise outlay if that outlay is subtracted separately. A payoff belongs to the holder and to one date and currency, with its tax and remaining liabilities treated consistently.

Select a valuation basis before averaging those consequences. Where probabilities and risk treatment support a conditional expected value, compare the available actions using that basis. Where a supported price or value range suffices, use it. If overlapping ranges prevent a unique choice, retain the condition under which each action is preferable rather than inventing a probability or risk rate.

For several stages, work backward. At the last decision, compare the values of the actions still feasible with the information available there. At the preceding observation, value the resulting conditional choices using the supported pricing or probability/risk model. Include cash paid or received between those points. At the earlier decision, compare that continuation with immediate exercise, another mode, abandonment or lapse as applicable. Repeat to the present. The result is an action rule attached to observations, not merely a favorable terminal payoff.