Linear Algebra in Analyzing Finance

  • Thread starter Kindayr
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Main Question or Discussion Point

This is more of a conceptual question more than anything. I've never done any financial modelling, let alone modelling at all, in my entire academic career. So I was just wondering about a good way to think about this question.

My Girlfriend is working on a problem for one of her business projects, and she has to decide the best way to choose from 12 bids. Each bid consists of its price and which products go along with the bid.

So basically, you have a sequence of zeroes and ones of length 12; 1's representing which product is being offered to be sold with that bid, and then lastly a price attached to each bid.

What would be a good way to optimize this situation?
 

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Stephen Tashi
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Any attempt to find a mathematical "best" needs to have a clear definition of what "best" means. Often this is done by specifying a formula that gives a numerical value ("utility") to a given course of action. You also need to be clear about constraints. For example, are there certain products that are absolutely required? Can the purchaser accept more than one bid? If a product is not included in the bid and is required, can the cost of purchasing it from another source be estimated?

If you can fill-in details like that, you can formulate the problem as an mathematical optmization problem. That could be called a model. Or were you thinking of a model as something more elaborate, like a computer simulation? With enough detail, that could also be done.
 

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