Warning: Discretize With Care
David J. Braden, Harry Groenevelt · SSRN Electronic Journal · 2000
Decision analysts commonly use low-order discrete approximation of probability distributions to reduce computational effort. We have found that three popular discretization methods can lead to serious errors in certain applications, among them, news vendor problem and scheduling decisions for service-facilities. We demonstrate that the moment-matching approach to discretization can be particularly poor, and discuss how one might uncover potential problems due to discretization.