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Buridan's Ass and a Menu of Options

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Author Info
Svetlana Boyarchenko (The University of Texas at Austin)

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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://129.3.20.41/eps/game/papers/0501/0501006.pdf
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Publisher 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://129.3.20.41

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

Other versions of this item:

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 and Programming - - - Optimization Techniques; Programming Models; Dynamic Analysis
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy

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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.:
  1. Ted O'Donoghue & Matthew Rabin, 2001. "Choice And Procrastination," The Quarterly Journal of Economics, MIT Press, vol. 116(1), pages 121-160, February. [Downloadable!] (restricted)
  2. 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. [Downloadable!]
    Other versions:
  3. Ted O' Donoghue & Matthew Rabin, 2001. "Choice and Procrastination," Microeconomics 0012002, EconWPA. [Downloadable!]
  4. Svetlana Boyarchenko, 2004. "Irreversible Decisions and Record-Setting News Principles," American Economic Review, American Economic Association, vol. 94(3), pages 557-568, June. [Downloadable!]
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