On Risk and Time Pressure: When to Think and When to Do
41 Pages Posted: 6 Dec 2019 Last revised: 19 Nov 2020
Date Written: November 12, 2020
We study the tradeoff between fundamental risk and time. A time-constrained agent has to solve a problem. The agent dynamically allocates effort to implementing a known yet risky method or developing a new, less risky method. The time remaining to implement a new method determines the value of the agent's discovery. Under the optimal policy, the agent may switch from implementing the old to developing a new and back to implementing the old method. Successful development of new methods is most likely if the time horizon is intermediate. The results differ qualitatively if new approaches are developed through lean techniques.
Keywords: dynamic problem solving, endogenous bandits, lean techniques, time pressure
JEL Classification: D01, D83, O31
Suggested Citation: Suggested Citation