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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- Ted O'Donoghue & Matthew Rabin, 2001.
"Choice And Procrastination,"
The Quarterly Journal of Economics,
MIT Press, vol. 116(1), pages 121-160, February.
- O'Donoghue, Ted & Rabin, Matthew, 2000. "Choice and Procrastination," Department of Economics, Working Paper Series qt5r26k54p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ted O' Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," Microeconomics 0012002, EconWPA.
- Ted O' Donoghue and Matthew Rabin., 2000. "Choice and Procrastination," Economics Working Papers E00-281, University of California at Berkeley.
- Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June.
- David K. Levine & Drew Fudenberg, 2006.
"A Dual-Self Model of Impulse Control,"
American Economic Review,
American Economic Association, vol. 96(5), pages 1449-1476, December.
- Drew Fudenberg & David K. Levine, 2006. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2112, Harvard - Institute of Economic Research.
- Fudenberg, Drew & Levine, David, 2006. "A Dual-Self Model of Impulse Control," Scholarly Articles 3196335, Harvard University Department of Economics.
- Drew Fudenberg & David K. Levine, 2004. "A Dual Self Model of Impulse Control," Harvard Institute of Economic Research Working Papers 2049, Harvard - Institute of Economic Research.
- Drew Fudenberg & David K Levine, 2005. "A Dual Self Model of Impulse Control," Levine's Working Paper Archive 618897000000000876, David K. Levine.
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