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 Subtype||Journal Article|
|Title||Learning to wait: A laboratory investigation|
|Series title||Review of Economic Studies|
|Contributing office(s)||Eastern Energy Resources Science Center|
|Google Analytic Metrics||Metrics page|