TL;DR
A method for solving sequential games by analyzing from the last decision point backward to the first. At each node, the player chooses the action that maximizes their payoff given optimal future play.
Backward Induction
A method for solving sequential games by analyzing from the last decision point backward to the first. At each node, the player chooses the action that maximizes their payoff given optimal future play.
Why it matters for interviews
The standard technique for solving game trees, option pricing (binomial tree), and dynamic programming problems in quant interviews. It yields subgame perfect equilibria.
Definition and Mathematical Foundation
A method for solving sequential games by analyzing from the last decision point backward to the first. At each node, the player chooses the action that maximizes their payoff given optimal future play.
Application in Quantitative Finance
The standard technique for solving game trees, option pricing (binomial tree), and dynamic programming problems in quant interviews. It yields subgame perfect equilibria.
Related Concepts
Related Terms
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