Shifting analysis to individual trees and their immediate neighborhood environments represents an important development in the continued evolution of forest economics. We review the history of individual- and neighborhood- based approaches in ecology and silviculture, and find evidence from those fields that neighborhood models of tree growth and dynamics are more descriptive than coarser-scale models, particularly for the diverse, structurally complex stands that are of increasing interest and importance to forest managers and society. Moreover, we show how economic analysis of heterogeneousquality forests is highly susceptible to aggregation problems. A thinning-and-harvest schedule optimized on the basis of stand-average stocking, structure or demographics, and applied uniformly across the stand, will generate systematically less value than the aggregate value produced from unique cutting schedules optimized for individual neighborhoods. From Jensen’s inequality, the optimum of the mean is not the mean of the optima. We then outline an iterative, forward recursive solution method to optimize individual-tree thinning and retention decisions at the neighborhood scale, and illustrate this neighborhood-based approach with a numerical example. Finally, we discuss the operational advantages of this approach and briefly explore some new avenues of economic research that this framework could open up.
