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Information acquisition as an American option

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  • Jafarizadeh, Babak

Abstract

Many information acquisition activities can be postponed within a predefined time-frame. In uncertain situations, the option to postpone the information acquisition to a later, more favorable time may create value. We discuss the value that comes from holding an option to acquire information in a time period and suggest a simulation-based numerical approach to calculate the associated value. We discuss that the value of information in a time period may be very different from the value of information in a single point in time. This value is closely linked to the uncertainty of the decision outcomes over the time period.

Suggested Citation

  • Jafarizadeh, Babak, 2012. "Information acquisition as an American option," Energy Economics, Elsevier, vol. 34(3), pages 807-816.
  • Handle: RePEc:eee:eneeco:v:34:y:2012:i:3:p:807-816
    DOI: 10.1016/j.eneco.2011.04.002
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    References listed on IDEAS

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    1. Andrea Gamba & Nicola Fusari, 2009. "Valuing Modularity as a Real Option," Management Science, INFORMS, vol. 55(11), pages 1877-1896, November.
    2. Kevin F. McCardle, 1985. "Information Acquisition and the Adoption of New Technology," Management Science, INFORMS, vol. 31(11), pages 1372-1389, November.
    3. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    4. Ronald W. Hilton, 1981. "The Determinants of Information Value: Synthesizing Some General Results," Management Science, INFORMS, vol. 27(1), pages 57-64, January.
    5. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    6. James E. Smith, 1998. "Evaluating Income Streams: A Decision Analysis Approach," Management Science, INFORMS, vol. 44(12-Part-1), pages 1690-1708, December.
    7. Broadie, Mark & Glasserman, Paul, 1997. "Pricing American-style securities using simulation," Journal of Economic Dynamics and Control, Elsevier, vol. 21(8-9), pages 1323-1352, June.
    8. Margaret Armstrong & William Bailey & Benoît Couët, 2005. "The Option Value of Acquiring Information in an Oilfield Production Enhancement Project," Journal of Applied Corporate Finance, Morgan Stanley, vol. 17(2), pages 99-104.
    9. Longstaff, Francis A & Schwartz, Eduardo S, 2001. "Valuing American Options by Simulation: A Simple Least-Squares Approach," University of California at Los Angeles, Anderson Graduate School of Management qt43n1k4jb, Anderson Graduate School of Management, UCLA.
    10. repec:dau:papers:123456789/607 is not listed on IDEAS
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