Real Options, Ambiguity, and Dynamic Consistency - A Technical Note
International Journal of Production Economics, forthcoming
6 Pages Posted: 5 Apr 2020 Last revised: 24 Apr 2020
Date Written: April 24, 2020
Recent research on real options does not only consider optimal investment decisions under risk, but also under ambiguity. However, most models that allow for ambiguity are generally not dynamically consistent. Examples are, among others, the $\alpha$-MEU model, the imprecision aversion model, or the NMEU model. Dynamic consistency is however required to solve optimal stopping real options problems analytically or in closed-form. This paper highlights the resulting difficulties, which are often overlooked, exemplarily for the NMEU model.
Keywords: Ambiguity, dynamic consistency, real options, NMEU preferences, rectangularity, optimal stopping
JEL Classification: D81, G11
Suggested Citation: Suggested Citation