Investment Under Uncertainty: Testing the Options Model with Professional Traders

John A. List; MICHAEL S. HAIGH

doi:10.1162/rest_a_00041

Investment Under Uncertainty: Testing the Options Model with Professional Traders

John A. List^1,2,3; MICHAEL S. HAIGH⁴

¹ National Bureau of Economic Research · ² IZA - Institute of Labor Economics · ³ University of Chicago · ⁴ Commodity Futures Trading Commission

The Review of Economics and Statistics 2010 open access

An important class of investment decisions is characterized by unrecoverable sunk costs, resolution of uncertainty through time, and the ability to invest in the future as an alternative to investing today. The options model provides guidance in such settings, including an investment decision rule called the "bad news principle": the downside investment state influences the investment decision whereas the upside investment state is ignored. This study takes a new approach to examining predictions of the options model by using the tools of experimental economics. Our evidence, which is drawn from student and professional trader subject pools, is broadly consonant with the options model.

DOI: 10.1162/rest_a_00041
Volume: 92 (4)
Pages: 974-984
Language: en
Export: BibTeX
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