Journal Article

Learning to Wait: A Laboratory Investigation

Ryan Oprea, Daniel Friedman and Steven T. Anderson

in The Review of Economic Studies

Published on behalf of Review of Economic Studies Ltd

Volume 76, issue 3, pages 1103-1124
Published in print July 2009 | ISSN: 0034-6527
Published online July 2009 | e-ISSN: 1467-937X | DOI: http://dx.doi.org/10.1111/j.1467-937X.2009.00543.x
Learning to Wait: A Laboratory Investigation

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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.

Keywords: C91

Journal Article.  9508 words.  Illustrated.

Subjects: Design of Experiments

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