Discounting, Diversity, and Investment

61 Pages Posted: 19 Sep 2016 Last revised: 9 Feb 2018

See all articles by Sebastian Ebert

Sebastian Ebert

Frankfurt School of Finance & Management

Wei Wei

University of Oxford

Xun Yu Zhou

Columbia University - Department of Industrial Engineering and Operations Research (IEOR)

Date Written: February 9, 2018

Abstract

Within the classical real option setting, we show that disagreement or uncertainty about what discount rate to use leads to delayed investment and more risk-taking. We connect with the behavioral economics literature and present the most comprehensive analysis of the impact of time preferences on investment decisions to date. Contrary to existing results, we show that time-inconsistency arising from behavioral time preferences leads to delayed rather than premature investment. We also find that, for these non-standard time preferences, the option value from investment may be zero.

Keywords: diversity, hyperbolic discounting, investment, parameter uncertainty, time inconsistency, weighted discounting

JEL Classification: G02, G11, D91

Suggested Citation

Ebert, Sebastian and Wei, Wei and Zhou, Xunyu, Discounting, Diversity, and Investment (February 9, 2018). Available at SSRN: https://ssrn.com/abstract=2840240 or http://dx.doi.org/10.2139/ssrn.2840240

Sebastian Ebert (Contact Author)

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Wei Wei

University of Oxford ( email )

Mansfield Road
Oxford, Oxfordshire OX1 4AU
United Kingdom

Xunyu Zhou

Columbia University - Department of Industrial Engineering and Operations Research (IEOR) ( email )

331 S.W. Mudd Building
500 West 120th Street
New York, NY 10027
United States

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