 |
 
|
•
•
|
|
A Laboratory Investigation of Deferral Options
Ryan Oprea, University of California, Santa Cruz
Daniel Friedman, University of California Santa Cruz Dept. of Economics
Steven T. Anderson
| ||||||
ABSTRACT: An irreversible investment opportunity has value V governed by Brownian motion with upward drift and random expiration. Human subjects choose in continuous time when to invest. If she invests before expiration, the subject receives V−C : the final value V less a given avoidable cost C . The optimal policy is to invest when V first crosses a threshold V ∗ = (1 + w∗ )C , where
the option premium w∗ is a specific function of the Brownian parameters representing drift, volatility and discount (or expiration hazard) rate.
We ran 80 periods each for 69 subjects. Subjects in the Low w∗ treatment on average invested at values quite close to optimum. Sub jects in the two Medium treatments and the High w∗ invested at values below optimum, but with the predicted ordering, and values approached the optimum by the last block of 20 periods. Behavior was most heterogeneous in the High treatment. Subjects underrespond to differences in both the volatility and expiration hazard parameters. A directional learning model suggests that sub jects react reliably to ex-post losses due to early investment, and react much more heterogeneously (and on average more strongly) to missed investment opportunities. Simulations show that this learning process converges on a nearly optimal steady state.
SUGGESTED CITATION:
Ryan Oprea, Daniel Friedman, and Steven T. Anderson,
"A Laboratory Investigation of Deferral Options"
(March 21, 2007).
Department of Economics, UCSC.
Paper 635.
http://repositories.cdlib.org/ucscecon/635
|
eScholarship is a service of the California Digital Library | 
|