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Buridan's Ass and a Menu of Options

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  • Svetlana Boyarchenko

    (The University of Texas at Austin)

Abstract

The 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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File URL: http://128.118.178.162/eps/game/papers/0501/0501006.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Game Theory and Information with number 0501006.

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Length: 19 pages
Date of creation: 31 Jan 2005
Date of revision: 13 Dec 2005
Handle: RePEc:wpa:wuwpga:0501006

Note: Type of Document - pdf; pages: 19
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Web page: http://128.118.178.162

Related research

Keywords: Real options; procrastination; choice between two projects;

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  1. Ted O'Donoghue & Matthew Rabin, 2001. "Choice And Procrastination," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 121-160, February.
  2. Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June.
  3. 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.
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