Option Exercise with Temptation

33 Pages Posted: 15 Sep 2004

See all articles by Jianjun Miao

Jianjun Miao

Boston University - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: September 2004

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.

JEL Classification: D11, G32

Suggested Citation

Miao, Jianjun, Option Exercise with Temptation (September 2004). Available at SSRN: https://ssrn.com/abstract=589561 or http://dx.doi.org/10.2139/ssrn.589561

Jianjun Miao (Contact Author)

Boston University - Department of Economics ( email )

270 Bay State Road
Boston, MA 02215
United States
617-353-6675 (Phone)

HOME PAGE: http://people.bu.edu/miaoj

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
111
Abstract Views
1,775
Rank
339,776
PlumX Metrics