Irreversible Decisions Research Articles

Investment Under Uncertainty When Interest Rates Are at the Zero Lower Bound

This paper examines irreversible investment decisions when interest rates are at the lower bound. A simple model is presented in which the shadow-rate model of Black (1995) is used for modeling interest rate uncertainty. It is shown that when interest rates are at the lower bound and the shadow rate is substantially below the bound the investment decision no longer depends on interest rate uncertainty. The decision to invest or wait is determined entirely by cash flow volatility. Monetary policy becomes ineffective because it cannot offset uncertainly shocks that increase the value of waiting. In contrast to extant approaches, the shadow rate model is consistent with prolonged periods of interest rates at the lower bound and low investment.

Game theory and risk‐based leveed river system planning with noncooperation

AbstractOptimal risk‐based levee designs are usually developed for economic efficiency. However, in river systems with multiple levees, the planning and maintenance of different levees are controlled by different agencies or groups. For example, along many rivers, levees on opposite riverbanks constitute a simple leveed river system with each levee designed and controlled separately. Collaborative planning of the two levees can be economically optimal for the whole system. Independent and self‐interested landholders on opposite riversides often are willing to separately determine their individual optimal levee plans, resulting in a less efficient leveed river system from an overall society‐wide perspective (the tragedy of commons). We apply game theory to simple leveed river system planning where landholders on each riverside independently determine their optimal risk‐based levee plans. Outcomes from noncooperative games are analyzed and compared with the overall economically optimal outcome, which minimizes net flood cost system‐wide. The system‐wide economically optimal solution generally transfers residual flood risk to the lower‐valued side of the river, but is often impractical without compensating for flood risk transfer to improve outcomes for all individuals involved. Such compensation can be determined and implemented with landholders' agreements on collaboration to develop an economically optimal plan. By examining iterative multiple‐shot noncooperative games with reversible and irreversible decisions, the costs of myopia for the future in making levee planning decisions show the significance of considering the externalities and evolution path of dynamic water resource problems to improve decision‐making.

Assessing the Awareness and Usage of Quality Control Tools with Emphasis to Statistical Process Control (SPC) in Ethiopian Manufacturing Industries

Introduction: The present work was devoted to assess the awareness and usage of quality control tools with the emphasis on statistical process control in Ethiopian manufacturing industries. Semi structured questionnaire has been employed to executive and technical managers of manufacturing industries of various size and specialism across the country. Stratified random sample method by region was used to select sample industries for the study. The samples used for this study are industries mainly from Oromiya, Addis Ababa, Tigray, Amara, SNNP and Diredawa regions proportional to their size of the available industries. Methods: Exploratory method and descriptive statistics was used for data analysis. Available documents and reports related to quality control policy of the selected companies were investigated. Results and Discussions: The number of manufacturing industries involved in this study was 44. Of the sampled manufacturing industries about 60% are from Oromiya and Addis Ababa regions. It has been reported that 100% of the respondents said that the importance of quality control tools is very important to their organizations’ productivity and quality improvement (Figure 3). Quality control professionals were also asked the extent to which quality control system is working in their industry and majority of the respondents (45%) have indicated that quality control system is working to some extent in their respective industries (Figure 18). Conclusions and Recommendations: Most of the quality department of the industries did not fully recognize the importance of statistical process control as quality control tools. This is mainly due to lack of awareness and motivation of the top managements, shortage of man power in the area, and others together would make it difficult to apply quality control tools in their organization. In general, the industries in Ethiopia are deficient in vigor and found to be stagnant hence less exposed to a highly competitive market and don’t adopt the latest quality control techniques in order to gain knowledge about systems to improve quality and operational performance. We conclude that quality management system has to be established as an independent entity with a real power and hence the quality control department which is responsible for quality can make an irreversible decision with respect to quality of any given product. Moreover, the concerned bodies (government and ministry of industries) should give attention and work together with universities to ensure how these statistical process control techniques could be incorporated in a curriculum of the universities at higher levels in degree and masters programs. Furthermore, different trainings which could improve quality and efficiency of their respective management system should be given as short and long term to the employees including top and middle managers found in various industries relevant to their process.

Capacity Investment under Demand Uncertainty: The Role of Imports in the U.S. Cement Industry

Demand uncertainty is thought to influence irreversible capacity decisions. Suppose that local demand can be sourced from domestic (rigid) production or from (flexible) imports. This paper shows that the optimal domestic capacity is either increasing or decreasing with demand uncertainty, depending on the relative level of the costs of domestic production and imports. We test this relationship with data from the U.S. cement industry, in which the difference in marginal cost between domestic production and imports varies across local U.S. markets because cement is costly to transport over land. Industry data for 1999 to 2010 are consistent with the predictions of the model. The introduction of two technologies to the production set—one rigid and one flexible—is crucial to understanding the relationship between capacity choice and uncertainty in this industry because there is no relationship between these two variables in aggregated U.S. data. Our analysis reveals that the relationship is negative in coastal districts, and significantly more positive in landlocked districts.

Integrated Power Systems—An Outline of Requirements and Functionalities for Ships

Selection of power and propulsion system architecture is one of the most far-reaching and irreversible decisions made by the designer of a modern ship. However, most texts and design handbooks pay little attention to the implications of this design decision nor is sufficient attention paid to the attributes of the various alternatives available to the ship designer/owner. Integrated power systems, made possible over the past three decades by the advances in modern high-power power electronics, provide many benefits to the ship owner, including reduced operating costs, arrangement flexibility, superior reliability and survivability, and support for advanced weapons on sensors warships. This paper will outline the architecture options available to today's ship designer and will discuss the design implications and pitfalls inherent in the power system architecture selection, paying particular attention to the unique aspects of integrated power systems.

Maximizers, Satisficers, and Their Satisfaction With and Preferences for Reversible Versus Irreversible Decisions

Previous research on decision reversibility has found that, although people believe they prefer reversible decisions, irreversible decisions yield the most satisfaction. Two studies investigated whether these findings are moderated by individuals’ tendencies toward maximizing (decision making via extensive search for the best option) versus satisficing (decision making via less exhaustive search and less optimizing). Study 1 found that satisficers were more satisfied following an irreversible decision about a poster choice, whereas maximizers were more satisfied following a reversible decision. When a different group of participants in Study 2 were asked whether they would prefer the reversible or irreversible versions of Study 1, satisficers disproportionately chose the irreversible version, and maximizers disproportionately chose the reversible version; however, some extreme maximizers preferred the irreversible version as a means of preventing needless worry or second guessing. The results demonstrate that individual differences are likely to moderate even robust patterns of decision making and affective forecasting.

Should I Stay Ot Should I Go? - A Laboratory Analysis of Investment Opportunities Under Ambiguity

This paper investigates the impact of uncertainty on an irreversible investment decisions in the laboratory. Subjects own the option to seize a claim on the future sum of realizations from an (ambiguous) random walk. I contrast model predictions of the Subjective Expected Utility model (SEU, Savage, 1954) with model predictions made by Multiple-prior Expected Utility models (MEU, Gilboa & Schmeidler, 1989; Epstein & Schneider, 2003b). I present an experimental design that allows to identify behaviorally meaningful deviations from SEU. Observed behavior is at odds with the SEU prediction. On average, subjects in a treatment group, facing an ambiguous random walk, exhibit an ambiguity premium that presents a mark-up on average reservation profits in a control group. Hence, subjects shun to expose themselves to an ambiguous payoff process and invest later than participants facing a risky payoff process.

Comparison of locus-specific databases for BRCA1 and BRCA2 variants reveals disparity in variant classification within and among databases.

Genetic variants of uncertain clinical significance (VUSs) are a common outcome of clinical genetic testing. Locus-specific variant databases (LSDBs) have been established for numerous disease-associated genes as a research tool for the interpretation of genetic sequence variants to facilitate variant interpretation via aggregated data. If LSDBs are to be used for clinical practice, consistent and transparent criteria regarding the deposition and interpretation of variants are vital, as variant classifications are often used to make important and irreversible clinical decisions. In this study, we performed a retrospective analysis of 2017 consecutive BRCA1 and BRCA2 genetic variants identified from 24,650 consecutive patient samples referred to our laboratory to establish an unbiased dataset representative of the types of variants seen in the US patient population, submitted by clinicians and researchers for BRCA1 and BRCA2 testing. We compared the clinical classifications of these variants among five publicly accessible BRCA1 and BRCA2 variant databases: BIC, ClinVar, HGMD (paid version), LOVD, and the UMD databases. Our results show substantial disparity of variant classifications among publicly accessible databases. Furthermore, it appears that discrepant classifications are not the result of a single outlier but widespread disagreement among databases. This study also shows that databases sometimes favor a clinical classification when current best practice guidelines (ACMG/AMP/CAP) would suggest an uncertain classification. Although LSDBs have been well established for research applications, our results suggest several challenges preclude their wider use in clinical practice.Electronic supplementary materialThe online version of this article (doi:10.1007/s12687-015-0220-x) contains supplementary material, which is available to authorized users.

A polyubiquitin chain reaction: parkin recruitment to damaged mitochondria.

Mutations in the E3 ubiquitin ligase Parkin or the mitochondrial kinase PINK1 cause autosomal recessive forms of Parkinson’s disease [1, 2]. Genetic and cell biological studies have implicated PINK1 and Parkin as critical elements in mitophagy, a mitochondrial quality control pathway that involves the ubiquitin-proteasome system (UPS) and the autophagy-lysosomal system [1, 2]. Under basal conditions, PINK1 is processed by mitochondrial proteases and targeted for degradation by the UPS [1, 2]. Following persistent mitochondrial damage (e.g., treatment with the mitochondrial uncoupling agent CCCP) PINK1 is stabilized and accumulates in an active form on the outer mitochondrial membrane [1, 2]. Although PINK1 activity is essential for the mitochondrial recruitment of cytoplasmic Parkin and for the subsequent ubiquitin-dependent clearance of damaged mitochondria, the mode of Parkin activation and recruitment has been elusive [1, 2].

Should I Stay or Should I Go? A Laboratory Analysis of Investment Opportunities Under Ambiguity

This paper investigates the impact of uncertainty on an irreversible investment decisions in the laboratory. Subjects own the option to seize a claim on the future sum of realizations from an (ambiguous) random walk. I contrast model predicitions of the Subjective Expected Utility model (SEU, Savage, 1954) with model predictions made by Multiple-prior Expected Utility models (MEU, Gilboa & Schmeidler, 1989; Epstein & Schneider, 2003b). I present an experimental design that allows to identify behaviorally meaningful deviations from SEU. Observed behavior is at odds with the SEU prediction. On average, subjects in a treatment group, facing an ambiguous random walk, exhibit an ambiguity premium that presents a mark-up on average reservation profits in a control group. Hence, subjects shun to expose themselves to an ambiguous payoff process and invest later than participants facing a risky payoff process.

REAL OPTIONS WITH COMPETITION AND REGIME SWITCHING

In this paper, we examine irreversible investment decisions in duopoly games with a variable economic climate. Integrating timing flexibility, competition, and changes in the economic environment in the form of a cash flow process with regime switching, the problem is formulated as a stopping‐time game under Stackelberg leader‐follower competition, in which both players determine their respective optimal market entry time. By extending the variational inequality approach, we solve for the free boundaries and obtain optimal investment strategies for each player. Despite the lack of regularity in the leader's obstacle and the cash flow regime uncertainty, the regime‐dependent optimal policies for both the leader and the follower are obtained. In addition, we perform comprehensive numerical experiments to demonstrate the properties of solutions and to gain insights into the implications of regime switching.

Changing Times – Family Formation Processes among Turkish Immigrant Women and Their Danish Majority Peers

This article compares the family formation processes among young Turkish immigrant women in Denmark with those of their majority Danish peers. The study draws on biographical interviews and available statistics, both of which reveal marked differences between the two groups. The majority women's family formation processes consist of many uncoupled and reversible transitions, focusing on “gaining experience” until making the irreversible decision of having their first child. This birth often occurs before marriage in the Danish context, which subsequently institutionalizes the already formed family. In contrast, Turkish immigrant women's family formation processes consist of tightly clustered transitions, occurring in a normatively sanctioned order. While the timing of these transitions in the 1990s clearly resembled the processes found in Turkish villages, this timing has since changed. Greater participation in education in Denmark contributes both to young Turkish women increasingly postponing marriage and the partner selection processes changing considerably. While Turkish immigrant women are now getting married at older ages, some do so without changing the sequencing of other family formation transitions. Thus, marrying later possibly also means delaying their first sexual experience and moving away from the parental home. In other cases, Turkish immigrant women engage in pre-marital sex but often seek to conceal this from their surroundings.

Explicit investment rules with time-to-build and uncertainty

We establish explicit socially optimal rules for an irreversible investment decision with time-to-build and uncertainty. Assuming a price sensitive demand function with a random intercept, we provide comparative statics and economic interpretations for three models of demand (arithmetic Brownian, geometric Brownian, and the Cox–Ingersoll–Ross). Committed capacity, that is, the installed capacity plus the investment in the pipeline, must never drop below the best predictor of future demand, minus two biases. The discounting bias takes into account the fact that investment is paid upfront for future use; the precautionary bias multiplies a type of risk aversion index by the local volatility. Relying on the analytical forms, we discuss in detail the economic effects. For example, the impact of volatility on the optimal investment is negligible in some cases. It vanishes in the CIR model for long delays, and in the GBM model for high discount rates.

Optimal Sequential Plantings of Corn and Soybeans Under Price Uncertainty

AbstractOptimal crop choice and fertilizer applications depend on the stochastic dynamics of commodity prices, fertilizer prices, and the agronomic effects of rotation versus monoculture. The efficient decision rule accounts for real option values associated with maintaining land disposition in an environment with highly uncertain future prices and irreversible past planting decisions. We parameterize a baseline model for a representative acre in Iowa and compare the model's predictions and profits to relatively naive, shorter horizon decision rules, and a field managed with optimal fertilizer applications conditional on corn and soybeans always being rotated. We also examine the effects of a permanently larger premium on corn prices relative to soybean prices, which has been observed in locations near recently established ethanol plants. We then compare the various decision rules to actual crop choices in a panel of over 6,500 Iowa plots during 1979–2007. As compared to less forward‐looking objectives, we find the agronomic benefits of rotations coupled with real option values can lead to a more inelastic response of planting decisions to both transitory and permanent price changes. Always rotating, regardless of prices, is close to optimal, but so are shorter‐horizon objectives. One implication is that reduced corn monoculture and fertilizer application rates might be implemented with modest incentive payments of $4 per acre or less.

Optimal costless extraction rate changes from a non-renewable resource

This paper considers the role of costless decisions relating to the extraction of a non-renewable resource in the presence of uncertainty. We begin by deriving a size scale of the extractable resource, above which the solution to the valuation and optimal control strategy can be described by analytic solutions; we produce solutions for a general form of operating cost function. Below this critical resource size level the valuation and optimal control strategy must be solved by numerical means; we present a robust numerical algorithm that can solve such a class of problem. We also allow for the embedding of an irreversible investment decision (abandonment) into the optimisation. Finally, we conduct experimentation for each of these two approaches (analytical and numerical), and show how they are consistent with one another when used appropriately. The extensions of this paper's techniques to renewable resources are explored.

Projection Bias in Household Investment? The Case of Solar Photovoltaics in Germany

This paper tests for the presence of projection bias in the context of an irreversible household investment decision. Households have to forecast their future flow of utility when making inter-temporal purchase decisions, which might be affected by psychological factors. I study whether short-lived weather shocks have an impact on household investment in solar adoption, where sunshine can be directly linked to financial utility. Focusing on Germany, the largest market for residential solar worldwide, I find that a standard deviation outlier in monthly sunshine hours leads on average to one additional installation. Other weather shocks such as temperature, rain, and snow do not have any significant impact on technology uptake. The findings are in line with the behavioral economic concept of projection bias (Loewenstein, O’Donoghue, and Rabin (2003)).

Counseling for non-invasive prenatal testing (NIPT): what pregnant women may want to know

Counseling for non-invasive prenatal testing (NIPT): what pregnant women may want to know

The use of strong and weak form sustainability to assist in rate development for the valuation of exhaustible resources (part I)

Purpose – The purpose of this paper, which is the first of a two-part series, is to build upon the established research on environmental economics and sustainability theory developed by Ramsey (1928), Weitzman (2007) and Gollier (2010). The Ramsey-Weitzman-Gollier model, with the contribution of Howarth (2009) and Nordhaus (2007a, b), focuses on discount rate development for environmental and long-term assets, linking discounted utility analysis embedded in the CCAPM model of Lucas (1978) to the policy concerns associated with the valuation of public and sustainable resources. This paper further investigates these issues to the rates structure appropriate for exhaustible resources with a particular emphasis on urban land, based upon the differentiation of strong and weak form sustainability concepts constrained by the objectives of the sustainable criterion of Daly and Cobb (1994). Design/methodology/approach – The paper integrates the concepts of discount rate development for environmental and long-term assets and discounted utility analysis to the policy concerns associated with the valuation of public and sustainable resources. It develops new theoretical insight in order to allow the theoretical formulation of discount and capitalization rates that can be empirically applied and tested. Findings – The paper provides theoretical support for a new approach concerned with the development of capitalization and discount rates in the valuation of non-renewable resources. A key concern of valuing non-renewable or limited resource endowments (in space or time) is the problem of irreversible investment or irrevocable decision implementation as suggested by Arrow-Fisher (1974), Krautkraemer (1985) and Daly and Cobb (1994). It investigates the challenge with developing capitalization rates and valuation of depleting resources temporally, within the constraints of sustainability. To achieve this, an optimal control discounting procedure subject to a sustainable objective statement is employed – in this context it suggests that sustainability should be treated as an alternative to traditional growth and the maximization of near-term returns. Originality/value – This paper extends the construct of developing rates structures appropriate for the valuation of exhaustible resources. It places a conceptual emphasis on urban land development. The measures developed and the insights gained may serve as a basis for future research on the optimal levels of sustainable development appropriate for different nations.

Deciding about fertility preservation after specialist counselling.

How do female patients experience fertility preservation (FP) consultation (FPC) with a specialist in reproductive medicine and subsequent decision-making on FP? Most patients had positive experiences with FPC, but negative experiences were found to be associated with decisional conflict and decision regret. When confronted with a need for gonadotoxic treatment, girls and young women will have to make an irreversible decision with regard to FP. Patients may experience decisional conflict and develop regret about their decision during follow-up. Patients' opportunities to ask questions during FPC and their knowledge about FP have been inversely related to decisional conflict. A questionnaire on experiences with FPC, designed after qualitative research, was retrospectively distributed to 108 patients to whom FP was offered after FPC between July 2008 and July 2013. Aiming to minimize recall bias, we defined a subgroup of patients counselled since 2011 who had not yet tried to conceive after FPC. Patients were aged ≥16 years and had either cancer or a benign disease that required gonadotoxic therapy. They received FPC in a single university hospital in the Netherlands. Apart from patients' experiences, patients' characteristics, decisional conflict and decision regret were assessed. A total of 64 patients (59.3%) responded to the questionnaire. Patients generally had positive experiences with FPC, but indicated room for improvement. Negative experiences were associated with decisional conflict regarding the FP decision (not enough time for counselling: P < 0.0001; not having the opportunity to ask all questions during FPC: P < 0.0001; not feeling supported by the counsellor during decision-making: P = 0.0003; not all applicable options were discussed: P = 0.0001; benefits and disadvantages of FP options were not clearly explained: P = 0.0005). Decisional conflict was correlated to decision regret (P < 0.0001). In the subgroup of patients counselled after 2011 who had not tried to conceive (n = 33), similar results as for the total study population were found for the association of patient experiences with decisional conflict. Given our retrospective design, we were not informed about the causality of the associations observed. We studied Dutch patients who were counselled in a single centre and were at least 16 years old when filling in the questionnaire. This may limit the generalizability of our data to other settings and populations. More attention should be paid to improving FPC care. Interventions aiming at improving patients' comprehension of the topic of FP and their feelings of being supported in decision-making are advisable. This work was supported by the Radboud Institute for Health and an unconditional grant from Merck Serono. The authors have declared no conflicts of interest with respect to this work.

Controlling low rates of terminal cell differentiation through noise and ultra‐high feedback (981.1)

Mammalian tissue size is maintained by slow replacement of aging cells. For adipocytes, key regulators of glucose and lipid metabolism, the renewal rate is only 10% per year. Here we use computational modeling, quantitative mass spectrometry (1) and single‐cell microscopy (2) to show that expression noise acts within a network of more than six positive feedbacks to permit pre‐adipocytes to differentiate at very low rates. This solves two fundamental opposing requirements: high cell‐to‐cell signal variability generates very low differentiation rates while low signal variability keeps cells irreversibly locked in the differentiated state. Thus, the challenge of how higher eukaryotes control low rates of irreversible cell fate decisions can be solved by a balancing act between expression noise and ultra‐high feedback connectivity.(1) Abell E,…, Teruel MN (2011). Proc Natl Acad Sci U S A. Aug 30; 108(35):14485‐90.(2) Park BO,…, Teruel MN. (2012). Cell Reports 2012 Oct 25. PMID: 23063366.