| Abstract: | Human subjects decide when to sink a fixed cost C to seize an irreversible investment opportunity whose value V is governed by Brownian motion. The optimal policy is to invest when V first crosses a threshold V * = (1 + w *) C , where the wait option premium w * depends on drift, volatility, and expiration hazard parameters. Subjects in the Low w * treatment on average invest at values quite close to optimum. Subjects in the two Medium and the High w * treatments invested at values below optimum, but with the predicted ordering, and values approached the optimum by the last block of 20 periods. |
