Keeping Your options Open

Jean Guillaume Forand

No 1301, Working Papers from University of Waterloo, Department of Economics

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 fully characterise optimal experimentation policies and show that the decision-maker's incentive to actively manage its options has important implication 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 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 rast.

JEL-codes: C61 D81 D83 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2013-02, Revised 2015-02
New Economics Papers: this item is included in nep-mic and nep-ppm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Keeping your options open (2015)
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:wat:wpaper:1301

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