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When to Quit Under Uncertainty? A real options approach to smoking cessation

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  • Yu-Fu Chen
  • Dennis Petrie

Abstract

This paper models the decision to quit smoking like an investment decision where the quitter incurs a sunk withdrawal cost today and forgoes their consumer surplus from cigarettes (invests) and hopes to reap an uncertain reward of better health and therefore higher utility in the future (return). We show that a risk-averse mature smoker who expects to benefit from quitting may still rationally choose to delay quitting until they are more confident that quitting is the right decision for them. Such a decision by the smoker is due to the value associated with keeping their option of whether or not to quit open as they learn more about the damage that smoking will have on their future utility. Policies which reduce a smoker’s uncertainty about the damage that smoking with have on their future utility is likely to make them quit earlier.

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File URL: http://www.dundee.ac.uk/media/dundeewebsite/economicstudies/documents/discussion/DDPE_272.pdf
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Bibliographic Info

Paper provided by Economic Studies, University of Dundee in its series Dundee Discussion Papers in Economics with number 272.

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Length: 30 pages
Date of creation: Nov 2012
Date of revision:
Handle: RePEc:dun:dpaper:272

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Web page: http://www.dundee.ac.uk/econman/
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Keywords: smoking; quitting; optimal stopping problem; real options analysis; addiction;

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References

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