Option Exercise with Temptation

Jianjun Miao

Microeconomics from University Library of Munich, Germany

Abstract: This paper analyzes an agent¡¯s option exercise decision under uncertainty. The agent decides whether and when to do an irreversible activity. He is tempted by immediate gratification and suffers from self-control problems. This paper adopts the Gul and Pensendorfer self- control utility model. Unlike the time inconsistent hyperbolic discounting model, it provides an explanation of procrastination and preproperation based on time consistency. When applied to the investment and exit problems, it is shown that (i) if the project value is immediate, an investor may invest in negative NPV projects; (ii) if the production cost is immediate, a firm may exit even if it makes positive net profits; and (iii) if both rewards and costs are immediate, an agent may simply follow the myopic rule which compares only the current period benefit and cost.

Keywords: self-control; temptation; procrastination; preproperation; option value (search for similar items in EconPapers)
JEL-codes: D1 D2 D3 D4 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2004-09-11
Note: Type of Document - pdf; pages: 30
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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https://econwpa.ub.uni-muenchen.de/econ-wp/mic/papers/0409/0409002.pdf (application/pdf)

Related works:
Journal Article: Option exercise with temptation (2008)
Working Paper: Option Exercise with Temptation (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wpa:wuwpmi:0409002

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