Wald Revisited: The Optimal Level of Experimentation
AbstractThis paper revisits Wald's (1947) sequential experimentation paradigm, now assuming that an impatient decision maker can run variable-size experiments each period at some increasing and strictly convex cost before finally choosing an irreversible action. We translate this natural discrete time experimentation story into a tractable control of variance for a continuous time diffusion. Here we robustly characterize the optimal experimentation level: It is rising in the confidence about the project outcome, and for not very convex cost functions, the random process of experimentation levels has a positive drift over time. We also explore several parametric shifts unique to our framework. Among them, we discover what is arguably an 'anti-folk' result: Where the experimentation level is positive, it is often higher for a more impatient decision maker. This paper more generally suggests that a long-sought economic paradigm that delivers a sensible law of demand for information is our dynamic one namely, allowing the decision maker an eternal repurchase (resample) option.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Cowles Foundation for Research in Economics, Yale University in its series Cowles Foundation Discussion Papers with number 1176.
Length: 37 pages
Date of creation: May 1998
Date of revision:
Publication status: Published in Econometrica (November 2001), 69(6): 1629-1644
Contact details of provider:
Postal: Yale University, Box 208281, New Haven, CT 06520-8281 USA
Phone: (203) 432-3702
Fax: (203) 432-6167
Web page: http://cowles.econ.yale.edu/
More information through EDIRC
Postal: Cowles Foundation, Yale University, Box 208281, New Haven, CT 06520-8281 USA
Other versions of this item:
- Giuseppe Moscarini & Lones Smith, 1998. "Wald Revisited: The Optimal Level of Experimentation," Working papers 98-4, Massachusetts Institute of Technology (MIT), Department of Economics.
- C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
- C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
- C44 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: Special Topics - - - Operations Research; Statistical Decision Theory
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search, Learning, and Information
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- repec:cup:etheor:v:9:y:1993:i:3:p:431-50 is not listed on IDEAS
- Godfrey Keller & Sven Rady, 1997.
"Optimal Experimentation in a Changing Environment,"
STICERD - Theoretical Economics Paper Series
/1997/333, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
- Joseph Dimasi & Henry Grabowski & John Vernon, 1995.
"R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry,"
International Journal of the Economics of Business,
Taylor & Francis Journals, vol. 2(2), pages 201-219.
- Joseph A. Dimasi & Grabowski, Henry G. & Vernon, John, 1995. "R&D Costs, Innovative Output and Firm Size in the Pharmaceutical Industry," Working Papers 95-16, Duke University, Department of Economics.
- McLennan, Andrew, 1984. "Price dispersion and incomplete learning in the long run," Journal of Economic Dynamics and Control, Elsevier, vol. 7(3), pages 331-347, September.
- Dutta, Prajit K., 1997. "Optimal management of an R&D budget," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 575-602.
- Patrick Bolton & Christopher Harris, 1999. "Strategic Experimentation," Econometrica, Econometric Society, vol. 67(2), pages 349-374, March.
- Cressie, Noel & Morgan, Peter B., 1993. "The VPRT: A Sequential Testing Procedure Dominating the SPRT," Econometric Theory, Cambridge University Press, vol. 9(03), pages 431-450, June.
- Trefler, Daniel, 1993. "The Ignorant Monopolist: Optimal Learning with Endogenous Information," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 34(3), pages 565-81, August.
- James E. Rauch & Joel Watson, 1999.
"Starting Small in an Unfamiliar Environment,"
NBER Working Papers
7053, National Bureau of Economic Research, Inc.
- James E. Rauch & Joel Watson, 1999. "Starting Small in an Unfamiliar Environment," Cowles Foundation Discussion Papers 1218, Cowles Foundation for Research in Economics, Yale University.
- Rauch, J E & Watson, Joel, 1999. "Starting Small in an Unfamiliar Environment," University of California at San Diego, Economics Working Paper Series qt4rp145hc, Department of Economics, UC San Diego.
- Hector Chade & Edward E. Schlee, 2000. "Increasing Returns in the Value of Information," Econometric Society World Congress 2000 Contributed Papers 1715, Econometric Society.
- Cristina Mitaritonna & Zhanar Akhmetova, 2013. "A Model of Firm Experimentation under Demand Uncertainty: an Application to Multi-Destination Exporters," Working Papers 2013-10, CEPII research center.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Glena Ames).
If references are entirely missing, you can add them using this form.