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The Virtues of Hesitation: Optimal Timing in a Non-stationary World

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  • Urmee Khan
  • Maxwell B. Stinchcombe

Abstract

In many economic, political, and social situations, circumstances change at random points in time, reacting is costly, and reactions appropriate to present circumstances may become inappropriate upon future changes, requiring further costly reaction. Waiting is informative if arrival of the next change has non-constant hazard rate. We identify two classes of situations: in the first, delayed reaction is optimal only when the hazard rate of further changes is decreasing; in the second, it is optimal only when the hazard rate of further changes is increasing. These results in semi-Markovian decision theory provide motivations for building delay into decision systems. (JEL C61, D72, D82, D83, K10, M11)

Suggested Citation

  • Urmee Khan & Maxwell B. Stinchcombe, 2015. "The Virtues of Hesitation: Optimal Timing in a Non-stationary World," American Economic Review, American Economic Association, vol. 105(3), pages 1147-1176, March.
    • Handle: RePEc:aea:aecrev:v:105:y:2015:i:3:p:1147-76
    Note: DOI: 10.1257/aer.20121282
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    References listed on IDEAS

    as
    1. Simon, Leo K & Stinchcombe, Maxwell B, 1989. "Extensive Form Games in Continuous Time: Pure Strategies," Econometrica, Econometric Society, vol. 57(5), pages 1171-1214, September.
    2. Stinchcombe, Maxwell B., 1992. "Maximal strategy sets for continuous-time game theory," Journal of Economic Theory, Elsevier, vol. 56(2), pages 235-265, April.
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    Cited by:

    1. Svetlana Boyarchenko, 2020. "Super- and submodularity of stopping games with random observations," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 70(4), pages 983-1022, November.
    2. Scott A. Brave & Jose A. Lopez, 2019. "Calibrating Macroprudential Policy to Forecasts of Financial Stability," International Journal of Central Banking, International Journal of Central Banking, vol. 15(1), pages 1-59, March.
    3. Sander Heinsalu, 2020. "Infection arbitrage," Papers 2004.08701, arXiv.org, revised Apr 2020.
    4. Pfeifer, Lukáš & Hodula, Martin, 2018. "A profit-to-provisioning approach to setting the countercyclical capital buffer: the Czech example," ESRB Working Paper Series 82, European Systemic Risk Board.
    5. Pfeifer, Lukáš & Hodula, Martin, 2021. "A profit-to-provisioning approach to setting the countercyclical capital buffer," Economic Systems, Elsevier, vol. 45(1).
    6. Külpmann, Philipp, 2015. "Procrastination and projects," Center for Mathematical Economics Working Papers 544, Center for Mathematical Economics, Bielefeld University.

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • K10 - Law and Economics - - Basic Areas of Law - - - General (Constitutional Law)
    • M11 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Production Management

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