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Sequential Investment Decisions with Bayesian Learning

Author

Listed:
  • R. M. Cyert

    (Carnegie-Mellon University)

  • M. H. DeGroot

    (Carnegie-Mellon University)

  • C. A. Holt

    (University of Minnesota)

Abstract

This paper analyzes investment decisions that can be made in a modular form. It is motivated by the empirical observation that managements are particularly worried about "downside" risk. With a sequential approach this risk is minimized. An investment in a module produces information as well as profits or losses. In our model a larger investment produces more information in addition to larger profits or losses. Costs for changing the level of the investment from period to period are introduced. The optimal sequential investment policy is studied for a two-period problem. Conditions are presented under which no investment, a partial investment, or a full investment in the first period is optimal.

Suggested Citation

  • R. M. Cyert & M. H. DeGroot & C. A. Holt, 1978. "Sequential Investment Decisions with Bayesian Learning," Management Science, INFORMS, vol. 24(7), pages 712-718, March.
    • Handle: RePEc:inm:ormnsc:v:24:y:1978:i:7:p:712-718
    DOI: 10.1287/mnsc.24.7.712
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    Cited by:

    1. Yue, Xiaohang & Mukhopadhyay, Samar K. & Zhu, Xiaowei, 2006. "A Bertrand model of pricing of complementary goods under information asymmetry," Journal of Business Research, Elsevier, vol. 59(10-11), pages 1182-1192, October.
    2. Alexander Zimper, 2011. "Do Bayesians Learn Their Way Out of Ambiguity?," Decision Analysis, INFORMS, vol. 8(4), pages 269-285, December.
    3. Ludwig, Alexander & Zimper, Alexander, 2014. "Biased Bayesian learning with an application to the risk-free rate puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 79-97.
    4. Boutselis, Petros & McNaught, Ken, 2014. "Finite-Time Horizon Logistics Decision Making Problems: Consideration of a Wider Set of Factors," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Blecker, Thorsten & Kersten, Wolfgang & Ringle, Christian M. (ed.), Innovative Methods in Logistics and Supply Chain Management: Current Issues and Emerging Practices. Proceedings of the Hamburg International Conferenc, volume 19, pages 249-274, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.
    5. Anna Grandori, 2013. "Models of rationality in economic organization: ‘economic’, ‘experiential’ and ‘epistemic’," Chapters, in: Anna Grandori (ed.), Handbook of Economic Organization, chapter 1, Edward Elgar Publishing.
    6. Giora Harpaz & Roger Mesznik, 1986. "Optimal Government Policy with Imperfect Information," The American Economist, Sage Publications, vol. 30(1), pages 28-31, March.
    7. Seung Hyun Kim & Tridas Mukhopadhyay, 2011. "Determining Optimal CRM Implementation Strategies," Information Systems Research, INFORMS, vol. 22(3), pages 624-639, September.

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