Option values and flexibility preference

TitleOption values and flexibility preference
Publication TypeWorking Paper
Year of Publication1998
AuthorsE. Strazzera
Number1998_07
Abstract

Preference for flexibility is a behavioral attitude displayed by people that prefer reversible to irreversible actions, and that are willing to pay a premium in order to maintain the possibility of changing their decision. This paper provides a functional characterization of preference for flexibility, based on the notion of option value. The proposed theory is shown to be useful to explain the success of marketing policies that guarantee reimbursement in consumption goods and financial markets. Moreover, it is possible to interpret some 'puzzles' about observed economic behavior: for example, choice of apparently inferior solutions when economic, or political, choices involve high degrees of irreversibility.

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