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Cautious Stochastic Choice, optimal stopping and deliberate randomization
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Henderson, Vicky, Hobson, David and Zeng, Matthew (2023) Cautious Stochastic Choice, optimal stopping and deliberate randomization. Economic Theory, 75 . pp. 887-922. doi:10.1007/s00199-022-01428-2 ISSN 0938-2259.
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Official URL: http://doi.org/10.1007/s00199-022-01428-2
Abstract
We study Cautious Stochastic Choice (CSC) agents facing optimal timing decisions in a dynamic setting. In an expected utility setting, the optimal strategy is always a threshold strategy - to stop/sell the first time the price process exits an interval. In contrast, we show that in the CSC setting, where the agent has a family of utility functions and is concerned with the worst case certainty equivalent, the optimal strategy may be of non-threshold form and may involve randomization. We provide some carefully constructed examples, including one where we can solve explicitly for the optimal stopping rule and show it is a non-trivial mixture of threshold strategies. Our model is consistent with recent experimental evidence in dynamic setups whereby individuals do not play cut-off or threshold strategies.
Item Type: | Journal Article | ||||||||
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Divisions: | Faculty of Science, Engineering and Medicine > Science > Statistics | ||||||||
Journal or Publication Title: | Economic Theory | ||||||||
Publisher: | Springer | ||||||||
ISSN: | 0938-2259 | ||||||||
Official Date: | April 2023 | ||||||||
Dates: |
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Volume: | 75 | ||||||||
Number of Pages: | 40 | ||||||||
Page Range: | pp. 887-922 | ||||||||
DOI: | 10.1007/s00199-022-01428-2 | ||||||||
Status: | Peer Reviewed | ||||||||
Publication Status: | Published | ||||||||
Access rights to Published version: | Open Access (Creative Commons) | ||||||||
Date of first compliant deposit: | 30 March 2022 | ||||||||
Date of first compliant Open Access: | 13 April 2022 | ||||||||
RIOXX Funder/Project Grant: |
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