Early Exercise Error and the Pricing of American Put Options

I introduce an economically viable total error measure appropriate for American put option pricing algorithms which incorporates both pure pricing error and early exercise error. A rational option pricing result that motivates the pure pricing error is derived. Early exercise error is motivated by comparing expected discounted profits from early exercising the estimated model vs. the true optimal early exercise model. The measure applies to any American put option pricing algorithm and is illustrated for a modified Binomial algorithm. Economic significance is defined and early exercise error is seen to be economically significant