Learning to wait: A laboratory investigation
Review of Economic Studies
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Abstract
Human subjects decide when to sink a fixed cost C to seize an irreversible investment opportunity whose value V is governed by Brownian motion. The optimal policy is to invest when V first crosses a threshold V* = (1 + w*) C, where the wait option premium w* depends on drift, volatility, and expiration hazard parameters. Subjects in the Low w* treatment on average invest at values quite close to optimum. Subjects in the two Medium and the High w* treatments invested at values below optimum, but with the predicted ordering, and values approached the optimum by the last block of 20 periods.
| Publication type | Article |
|---|---|
| Publication Subtype | Journal Article |
| Title | Learning to wait: A laboratory investigation |
| Series title | Review of Economic Studies |
| DOI | 10.1111/j.1467-937X.2009.00543.x |
| Volume | 76 |
| Issue | 3 |
| Year Published | 2009 |
| Language | English |
| Publisher | Oxford Academic |
| Contributing office(s) | Eastern Energy Resources Science Center |
| Description | 22 p. |
| First page | 1103 |
| Last page | 1124 |