We introduce and solve a new class of static portfolio choice problems, where only the best realized alternative matters. A decision maker must simultaneously choose among independent ranked options, and the better alternatives have a lower chance of panning out. Each choice is costly, and just one option may be exercised. This often emerges in practice: (i) A student must make a costly and simultaneous application to many colleges, and is accepted with smaller chances by the better schools. (ii) An economics department must decide which of several PhD job candidates to fly out, and the better recruits will be available with smaller probability. We show that this problem entails maximizing a submodular function of finite sets --- which is NP hard in general. Still, we develop a marginal improvement algorithm that produces the optimal set in a quadratic number of steps. Applying it, we then show that the optimal choices are less risky than the sequentially optimal ones in Weitzman (1979), but riskier than the best singleton college choices. We also give practical rules of thumb, such as: (i) don't insure, choosing a safety school; instead, take risks; (ii) apply to an upwardly diverse portfolio of schools
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Phone: 1 212 998 3820|
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Hector Chade & Greg Lewis & Lones Smith, 2006. "The College Admissions Problem Under Uncertainty," 2006 Meeting Papers 125, Society for Economic Dynamics.
- Gul, Faruk & Stacchetti, Ennio, 1999. "Walrasian Equilibrium with Gross Substitutes," Journal of Economic Theory, Elsevier, vol. 87(1), pages 95-124, July.
- James Albrecht & Pieter Gautier, 2004.
"Equilibrium Directed Search with Multiple Applications,"
Econometric Society 2004 Latin American Meetings
330, Econometric Society.
- James Albrecht & Pieter A. Gautier & Susan Vroman, 2006. "Equilibrium Directed Search with Multiple Applications," Review of Economic Studies, Oxford University Press, vol. 73(4), pages 869-891.
- James Albrecht & Pieter Gautier & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Applications," Tinbergen Institute Discussion Papers 03-004/3, Tinbergen Institute, revised 14 Feb 2004.
- James Albrecht, Pieter Gautier, & Susan Vroman, 2003. "Equilibrium Directed Search with Multiple Application," Working Papers gueconwpa~03-03-02, Georgetown University, Department of Economics.
- Albrecht, James & Gautier, Pieter A. & Vroman, Susan, 2003. "Equilibrium Directed Search with Multiple Applications," IZA Discussion Papers 719, Institute for the Study of Labor (IZA).
- Burdett, Kenneth & Judd, Kenneth L, 1983. "Equilibrium Price Dispersion," Econometrica, Econometric Society, vol. 51(4), pages 955-69, July.
- lones smith & hector chade, 2004.
Econometric Society 2004 North American Summer Meetings
64, Econometric Society.
- Hector Chade & Lones Smith, . "Simultaneous Search," Working Papers 2168591, Department of Economics, W. P. Carey School of Business, Arizona State University.
- Lones Smith & Hector Chade, 2004. "Simultaneous Search," 2004 Meeting Papers 25, Society for Economic Dynamics.
- Hector Chade & Lones Smith, 2006. "Simultaneous Search," Cowles Foundation Discussion Papers 1556, Cowles Foundation for Research in Economics, Yale University.
- Hector Chade & Lones Smith, 2005. "Simultaneous Search," NajEcon Working Paper Reviews 172782000000000033, www.najecon.org.
- George J. Stigler, 1961. "The Economics of Information," Journal of Political Economy, University of Chicago Press, vol. 69, pages 213.
- Kenneth Burdett & Shouyong Shi & Randall Wright, 2001. "Pricing and Matching with Frictions," Journal of Political Economy, University of Chicago Press, vol. 109(5), pages 1060-1085, October.
- Milgrom, P. & Shannon, C., 1991.
"Monotone Comparative Statics,"
11, Stanford - Institute for Thoretical Economics.
- Weitzman, Martin L, 1979.
"Optimal Search for the Best Alternative,"
Econometric Society, vol. 47(3), pages 641-54, May.
- Kelso, Alexander S, Jr & Crawford, Vincent P, 1982. "Job Matching, Coalition Formation, and Gross Substitutes," Econometrica, Econometric Society, vol. 50(6), pages 1483-1504, November.
When requesting a correction, please mention this item's handle: RePEc:ecm:nasm04:64. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.