Keeping your options open

Jean Guillaume Forand

Journal of Economic Dynamics and Control, 2015, vol. 53, issue C, 47-68

Abstract: In standard models of experimentation, the costs of project development consist of (a) the direct cost of running trials as well as (b) the implicit opportunity cost of leaving alternative projects idle. Another natural type of experimentation cost, the cost of holding on to the option of developing a currently inactive project, has not been studied. In a multi-armed bandit model of experimentation in which inactive projects have explicit maintenance costs and can be irreversibly discarded, I show that the decision-maker׳s incentive to actively manage its options has important implications for the order of project development. In the model, an experimenter searches for a success among a number of projects by choosing both those to develop now and those to maintain for (potential) future development. In the absence of maintenance costs, optimal experimentation policies have a ‘stay-with-the-winner’ property: the projects that are more likely to succeed are developed first. Maintenance costs provide incentives to bring the option value of less promising projects forward, and under optimal experimentation policies, ‘going with the loser’ can be optimal: projects that are less likely to succeed are sometimes developed first.

Keywords: Experimentation; Maintenance costs; Multi-armed bandits (search for similar items in EconPapers)
JEL-codes: C61 D81 D83 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: Keeping Your Options Open (2011)
Working Paper: Keeping Your Options Open (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:53:y:2015:i:c:p:47-68

DOI: 10.1016/j.jedc.2015.02.008

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