Abstract
In this work, I develop an option pricing framework for an American option on multiple real investment portfolios, which have price processes, for which the martingale assumption does not hold. Taking recourse to the philosophical theory of many-valued logic, the paper shows how this framework can serve as an aid for decision makers, who are confronted with interval-identified underlying value estimates rather than point estimates. I use a non-parametric version of the Longstaff and Schwartz (2001) numerical option pricing algorithm to assess the optimal stopping times, which are embedded in the option pricing problem. Against the theoretical expectation, high levels of tolerance with respect to contradictory underlying price process information in the decision maker’s information processing do not lead to superior investment decisions.
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