Buridan's Ass and a Menu of Options
AbstractThe goal of the paper is to study how a menu of options affects decisions of a rational agent facing uncertainty over future payoff streams. Using the real options approach, we demonstrate that multiple options not only increase the barrier which the underlying stochastic variable has to reach in order investment became optimal, but cause the investor to be inactive even when the cost of investment is vanishing. As a technical contribution, the paper suggests a robust method of solution of a two-point optimal stopping problem.
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Bibliographic InfoPaper provided by EconWPA in its series Game Theory and Information with number 0501006.
Length: 19 pages
Date of creation: 31 Jan 2005
Date of revision: 13 Dec 2005
Note: Type of Document - pdf; pages: 19
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Real options; procrastination; choice between two projects;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
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Department of Economics, Working Paper Series
qt5r26k54p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
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