Learning to wait: A laboratory investigation

Review of Economic Studies
By: , and 



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
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