I recently purchased Paul Wilmott's Quant Finance FAQ book. In the book he states that the binomial option valuation method is 'rubbish'. Can anyone enlighten me as to what method he recommends for pricing an American option?
Lol, Mr Wilmott likes to provoke. If I had to guess I'd say that he would recommend a finite difference PDE method. Compared to that a binomial tree looks crude and inferior indeed, in almost every respect. PDE-based methods (discretized with finite differences/elements/volumes) offer far more flexibility and the literature on them is huge (borrowed from other disciplines, such as Computational Fluid Dynamics). I honestly don't know why anyone would use a binomial tree instead of a PDE method.