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Risk Aversion, Indivisible Timing Options, and Gambling

Abstract:

In this paper we model the behavior of a risk-averse agent who seeks to maximize expected utility and who has an indivisible asset and a timing option over when to sell this asset. Our main contribution is to show that, contrary to intuition, optimal behavior for such a risk-averse agent can include risk-increasing gambles. For example, a manager with a choice over when to disinvest from a project, a private homeowner with a property to sell, or an employee with a grant of American-style stoc...

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Publication status:
Published

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Publisher copy:
10.1287/opre.1120.1131

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Institution:
University of Oxford
Department:
Oxford, MPLS, Oxford-Man
Journal:
OPERATIONS RESEARCH
Volume:
61
Issue:
1
Pages:
126-137
Publication date:
2013
DOI:
EISSN:
1526-5463
ISSN:
0030-364X
URN:
uuid:f2fc6cfe-312d-414f-8ea0-845f8eb08112
Source identifiers:
354520
Local pid:
pubs:354520

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