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Buridan's Ass and a Menu of Options

Author

Listed:
  • 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.

Suggested Citation

  • Svetlana Boyarchenko, 2005. "Buridan's Ass and a Menu of Options," Game Theory and Information 0501006, EconWPA, revised 13 Dec 2005.
  • Handle: RePEc:wpa:wuwpga:0501006
    Note: Type of Document - pdf; pages: 19
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    File URL: http://econwpa.repec.org/eps/game/papers/0501/0501006.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Ted O'Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," The Quarterly Journal of Economics, Oxford University Press, vol. 116(1), pages 121-160.
    3. Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Real options; procrastination; choice between two projects;

    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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