Option Value Research Articles

Attentional mechanisms of the date/delay effect in intertemporal choice: An eye-tracking study.

Temporal discounting refers to the tendency to discount future rewards as a function of time until receipt of rewards. The discount rate can be reduced by experimentally manipulating time framing, an example being the date/delay effect: Specifically, if time until receipt of the reward is presented as a date (e.g., August 21, 2022) rather than as a delay (e.g., 136 days), temporal discounting is reduced. While this effect has been replicated several times, its underlying cognitive mechanisms are not well understood. Therefore, we used eye tracking to examine the role of attention in the date/delay effect. Participants completed both a delay and date condition of the Monetary Choice Questionnaire, while eye movements were recorded (N = 54). Results revealed a successful replication of the date/delay effect (p < .001, gav = 0.48). Eye tracking showed that participants compared time attributes (relative to reward attributes) more and fixated them longer in the date compared to the delay condition. Moreover, the absolute difference in reward values of choice options was more predictive of choosing the delayed reward in the date compared to the delay condition. Finally, explorative correlations revealed a stronger date/delay effect in participants who paid more attention to time than reward attributes in the delay condition and who used a more integrative search strategy. Our findings suggest that the date manipulation causes participants to weight rewards more strongly in their decision process than in the delay condition, ultimately reducing temporal discounting. Computation of time intervals in the date condition could possibly reflect an adaptation lowering the date/delay effect. (PsycInfo Database Record (c) 2024 APA, all rights reserved).

Amplifying the Anomaly: How Humans Choose Unproven Options and Large Language Models Avoid Them

ABSTRACT Both large language models (LLMs) and the human brain develop internal models of reality to make accurate predictions. Both typically prefer choices with the strongest track records. However, when faced with a creative challenge, LLMs remain committed to high-probability options while humans can opt for unproven ones. This paper delves into one way of making unlikely events plausible—“amplifying the anomaly.” The concept involves extrapolating viable consequences from an unlikely proposition. Rather than being treated as oddball events or “one-offs,” the anomaly permeates the creative work. Notably, novelty and appropriateness can be in tension with each other, with high utility coming at the cost of low novelty. Amplifying the anomaly aligns these competing demands. It enhances originality: the rarer a proposition and the more thoroughly it is worked out, the more unique and surprising the result. At the same time, the effectiveness and value of the unproven option also rises: thorough elaboration in the creative product establishes its fitness. Musical examples by Beethoven, Schubert, and contemporary composer Skye Macklay, along with creative products from other domains, illustrate this principle. Classic LLMs have several limitations that make it difficult to amplify the anomaly: they are steered toward norm-driven outcomes, make short-term decisions, and are not designed to self-evaluate. As a result, they have difficulty of developing unusual propositions in a non-obvious way without human guidance. Alternatives approaches, including adversarial networks and team AI, are briefly examined. Implications for the future of computational and human creativity are discussed.

Machine Learning Applications for the Valuation of Options on Non-Liquid Option Markets

Machine Learning Applications for the Valuation of Options on Non-Liquid Option Markets

Patient (pt) experience with and perceptions of transfusion-dependent (TD) and transfusion-independent (TI) myelofibrosis (MF): A qualitative interview study.

e23110 Background: MF is a rare myeloproliferative neoplasm for which Janus kinase inhibitors are the standard of care. Some Janus kinase inhibitors can exacerbate anemia, a hallmark feature of MF that increases in severity with disease progression. Red blood cell transfusions are an important component of anemia management, but transfusion dependence is an independent predictor of poor survival outcomes and is inversely correlated with quality of life (QOL). The current study aimed to elicit the perceived direct and indirect burden of transfusion dependence and its impact on pts with MF. Methods: Concept elicitation interviews were conducted remotely with Janus kinase inhibitor–experienced and symptomatic (MF Symptom Assessment Form v4.0 Total Symptom Score [TSS] ≥10) pts with MF across the US, UK, Germany, Italy, Spain, and Poland (N = 20). Five TD pts (≥2 blood transfusions in any 1 mo over the last 3 mo) and 15 TI pts (≤1 blood transfusion in any 1 mo over the last 3 mo) participated in 60-minute interviews, which followed a semistructured guide including open-ended questions and completion of ranking exercises and sociodemographic and clinical forms. Results: Of 20 pts, mean age was 59 years, 50% were male, and85% received a diagnosis of anemia after their MF diagnosis. Pts with anemia experienced a range of related symptoms, including fatigue (94%), weakness (53%), and night sweats (29%). These symptoms impacted several QOL domains, including emotional (88%) and physical (71%) health and social life (71%). Most pts (18 of 20) had received a transfusion in the past, of whom 5 were TD. In addition to higher transfusion burden, TD pts had higher symptom burden than TI pts (mean TSS, 30.8 vs 27.9).TD pts endorsed challenges with frequent transfusions relating to clinical concerns/safety (100%), convenience (100%), and travel (80%), all of which remained concerns when thinking about being TD in the future (40% each). These challenges resulted in emotional (80%) and physical (60%) impacts and impacts to activities of daily living (60%). Four of 5 (80%) reported that going ≥12 weeks without a transfusion would be helpful and positively impact their QOL. Similarly, TI pts felt it was important to remain TI, with 73% expressing concerns about becoming TD in the future. Regarding the most important MF treatment outcomes, MF symptom reduction and overall survival were the most common (40% each) among TD pts, and reduction/avoidance of transfusion was the most common (40%) among TI pts. Conclusions: These interviews characterize the substantial negative experiences with and perceptions of anemia and transfusions in pts with MF who are TD and those who are TI but concerned about becoming TD in the future. These findings highlight the value of treatment options that reduce/eliminate transfusion burden and prevent future transfusions in improving the experiences of pts with MF.

Patient-centered perspectives: Examining quality-of-life integration in phase III lung cancer trials (2019-2023).

e23181 Background: In the dynamic landscape of lung cancer treatment, marked by precision medicine advancements, addressing the persistent global health challenge of lung cancer requires nuanced evaluations beyond traditional endpoints like Overall Survival (OS). Aligned with the emphasis on patient-centered care, both the US FDA and ASCO advocate for consistent integration of Quality of Life (QoL) and Patient-Reported Outcomes (PRO). The FDA's 2021 guidance underscores standardized assessment strategies, and ASCO's conceptual framework highlights the pivotal role of QoL and PRO data in elucidating the genuine value of cancer treatment options. This investigation aims to illuminate the extent to which recent trials consider patients' subjective experiences without presupposing an impact on QoL. Methods: This systematic review analyzed PubMed for Phase III lung cancer clinical trials involving anticancer drugs conducted between 2019 and 2023 to assess if QoL was included as an endpoint. Subgroup analyses categorized trials by cancer subtype (e.g., non-small cell lung cancer [NSCLC], small cell lung cancer [SCLC]). Analyses were also stratified by publication year to explore potential temporal trends. The total prevalence of QoL as an endpoint was calculated across all lung cancer subtypes for the entire 5-year period. Subanalyses included impact factor categories (≥ 10 and &lt; 10) and differentiation between superiority and noninferiority trials. Results: The systematic analysis identified 191 Phase III lung cancer clinical trials published between 2019 and 2023, meeting the criteria. QoL was included in 31.93% of trials across all subtypes. Subgroup analyses showed that 33.72% of NSCLC trials incorporated QoL, with variations observed in early-stage resectable disease (26.31%) and unresectable advanced and metastatic cases (34.66%). For SCLC, 19.04% of trials included QoL, with none in the limited stage and 22.22% in the extensive stage. Stratified by publication year, 2019 had 33.33%, 2020 had 39.02%, 2021 had 33.33%, 2022 had 23.33%, and 2023 had 28.94% trials with QoL assessments. Stratification based on impact factor (IF) and trial type revealed 29.4% in Journals ≥10 IF, 35.6% in Journals &lt; 10 IF, 35.5% in superiority trials, and 21.6% in non-inferiority trials. Conclusions: Our analysis reveals a significant shortfall in incorporating QoL as an endpoint. Across all subtypes and stages, a limited percentage of trials included PRO, highlighting a crucial gap in evaluating the comprehensive impact of interventions. The underrepresentation of QoL assessments signals a need for greater attention to the holistic patient experience in lung cancer research. Moving forward, a more standardized and comprehensive integration of QoL assessments in Phase III trials is essential to enhance our understanding of treatment impact and inform more patient-centered care decisions.

The blind spot in residential mortgages: Increasing default option value in the face of declining house prices

The interest rate hikes intended to combat inflation have not only significantly increased mortgage payments, but also significantly depressed house prices. The probability of default for mortgages is typically estimated through the debt servicing ability of the obligor. The alternative estimation based on the default option, although well studied in literature, is typically not used by practitioners. This option is normally ‘deep out of money’ and moves in the money if the loan to value (LTV) increases significantly, even creating negative equity. This is typically a remote probability due to the down payment requirements, but not as much under the current environment, where the house price depreciation has significantly increased LTVs, especially for newer mortgages underwritten when house prices were at their peak. This paper discusses the potential risk management oversights in this environment, illustrating that the increasing default risk is not adequately captured in probability of default (PD) models based on debt servicing ability alone. This is also true for the loss given default (LGD) risk if the contemporaneous LTV effects are not captured. Numerical examples are provided to demonstrate the material increase in PD, LGD and the combined expected loss risk with increasing LTV. It also discusses an alternative default option PD model, its calibration and its usage for stress testing along with LGD modelling, which together capture the contemporaneous LTV effects.

CRE Redevelopment Options and the Use of Mortgage Financing

A significant share of commercial real estate (CRE) investment properties---about half by our estimates---are purchased without a mortgage. Using comprehensive microdata on transactions in the U.S. CRE market, we analyze which types of properties are purchased without a mortgage, highlighting the important role of renovation or redevelopment options. We show that mortgage-financed properties are less likely to be subsequently redeveloped, and that owners anticipate these redevelopment frictions and avoid mortgage financing for properties with greater redevelopment options. These effects were even stronger during the COVID-19 pandemic, when uncertainty increased redevelopment option values.

Explicit formulae for the valuation of European options with price impacts

In this work, we examine the consequences of trading a large position in vanilla European options within a multi-period binomial model framework for the underlying asset price, S. Given the significant size of the transaction, we expect both the derivative's price and the underlying asset's price to be affected by market impacts. Consequently, derivative valuation should incorporate these effects. To address this, we not only utilize a multi-period binomial model to represent the price process S but also incorporate trading impacts in a multiplicative manner.Moreover, we conduct our analysis in discrete time to better capture the influence of price impacts. Our findings suggest, for instance, that the strike price should be determined by both the trade's magnitude and parameterized market impacts. We present explicit formulas for European option prices under market impacts and offer numerical examples to elucidate our findings. Upon request, we can provide code implemented in the statistical package R.

Quantifying intangible values of wetlands as instrument for conservation in the Po delta park (Italy)

Wetlands possess intangible values that are usually overlooked in decision-making processes. Based on questionnaire surveys, this work aims to quantify both the non-use and cultural values provided by the different wetlands of the Po Delta Park (Northern Italy), selected as ideal case study, using willingness to pay (WTP) for wetland conservation and travel cost methods, respectively. Their relationships with socio-economic variables and respondents' preferences for current and future use were also analysed. The 61.39% of participants were willing to pay a mean amount of 95.8 € (±40). The average travel cost was 38.68 € (±6.24), with higher values observed for environmental experts than for other citizens. Wetlands differ significantly in travel costs, current and future use, but not in WTP. Poisson regressions showed that non-use and cultural values were significantly dependent on personal information, preference variables and travel distance. Intangible dimensions, such as bequest and existence values, showed higher valuations/rates than option and direct use values. The results highlight that perceptions of the intrinsic value of nature are influenced by demographic characteristics, distance from the area and desired future uses. Non-use values seem abstract and generalised to the whole area, regardless of the ecological characteristics of the wetland, even though a significant relation to wetland uses was observed. In contrast, cultural values are tied to specific wetlands, as indication of the importance of historical relationships between people and nature. Such findings underline that the different dimensions of intrinsic value of nature may act at different scales and help decision-makers to incorporate such values into environmental accounting.

Temporal context effects on suboptimal choice.

Choice can be driven both by rewards and stimuli that signal those rewards. Under certain conditions, pigeons will prefer options that lead to less probable reward when the reward is signaled. A recently quantified model, the Signal for Good News (SiGN) model, assumes that in the context of uncertainty, signals for a reduced delay to reward reinforce choice. The SiGN model provides an excellent fit to previous results from pigeons and the current studies are the first to test a priori quantitative predictions. Pigeons chose between a suboptimal alternative that led to signaled 20% food and an optimal alternative that led to 50% food. The duration of the choice period was manipulated across conditions in two experiments. Pigeons strongly preferred the suboptimal alternative at the shorter durations and strongly preferred the optimal alternative at the longer durations. The results from both experiments fit well with predictions from the SiGN model and show that altering the duration of the choice period has a dramatic effect in that it changes which of the two options pigeons prefer. More generally, these results suggest that the relative value of options is not fixed, but instead depends on the temporal context.

THE REAL OPTIONS VALUE OF OPEN INNOVATION THROUGH CROSS-BORDER MERGERS AND ACQUISITIONS: EVIDENCE FROM PUBLICLY LISTED FIRMS IN CHINA

This study examines the impact of open innovation through cross-border Mergers and Acquisitions (M&amp;A) on the real options value of Chinese publicly listed firms between 2008 and 2020. The findings demonstrate that open innovation through cross-border M&amp;A has a positive effect on the upside potential and a negative effect on the downside risk of firm performance. Additionally, absorptive capacity and corporate governance play significant moderating roles in shaping the real options value of open innovation through cross-border M&amp;A. These findings are robust across alternative measures of real options value and open innovation investments, sample classification based on institutional distance, and endogeneity tests. The research implies that cross-border M&amp;A, particularly in countries with a favourable innovation environment, plays a crucial role in strengthening firm performance. Additionally, the study underscores the need for firms to develop absorptive capacity and enhance corporate governance as part of their innovation strategies.

Estimating a Function and Its Derivatives Under a Smoothness Condition

We consider the problem of estimating an unknown function [Formula: see text] and its partial derivatives from a noisy data set of n observations, where we make no assumptions about [Formula: see text] except that it is smooth in the sense that it has square integrable partial derivatives of order m. A natural candidate for the estimator of [Formula: see text] in such a case is the best fit to the data set that satisfies a certain smoothness condition. This estimator can be seen as a least squares estimator subject to an upper bound on some measure of smoothness. Another useful estimator is the one that minimizes the degree of smoothness subject to an upper bound on the average of squared errors. We prove that these two estimators are computable as solutions to quadratic programs, establish the consistency of these estimators and their partial derivatives, and study the convergence rate as [Formula: see text]. The effectiveness of the estimators is illustrated numerically in a setting where the value of a stock option and its second derivative are estimated as functions of the underlying stock price.

Learning to Choose: Behavioral Dynamics Underlying the Initial Acquisition of Decision-Making.

Current theories of decision-making propose that decisions arise through competition between choice options. Computational models of the decision process estimate how quickly information about choice options is integrated and how much information is needed to trigger a choice. Experiments using this approach typically report data from well-trained participants. As such, we do not know how the decision process evolves as a decision-making task is learned for the first time. To address this gap, we used a behavioral design separating learning the value of choice options from learning to make choices. We trained male rats to respond to single visual stimuli with different reward values. Then, we trained them to make choices between pairs of stimuli. Initially, the rats responded more slowly when presented with choices. However, as they gained experience in making choices, this slowing reduced. Response slowing on choice trials persisted throughout the testing period. We found that it was specifically associated with increased exponential variability when the rats chose the higher value stimulus. Additionally, our analysis using drift diffusion modeling revealed that the rats required less information to make choices over time. These reductions in the decision threshold occurred after just a single session of choice learning. These findings provide new insights into the learning process of decision-making tasks. They suggest that the value of choice options and the ability to make choices are learned separately and that experience plays a crucial role in improving decision-making performance.

Role of Optimal Investment Timing using Real Option Valuation to Support Foreign Direct Investment Decision Making

Role of Optimal Investment Timing using Real Option Valuation to Support Foreign Direct Investment Decision Making

Economic Valuation of Mangrove Ecosystem in Sari Ringgung, Pesawaran Regency, Lampung Province

Mangrove ecosystems play an important role in human life. It’s ecological role includes trapping sediment, protecting shorelines, and providing a natural habitat. The economic function of mangrove forests is for it to be a place for mangrove ecotourism, source of fisheries, source of food, and so on. This research aimed to quantify the monetary value of mangrove forests in Sari Ringgung. The method used in this study is an exploratory descriptive method that quantifies the total value of direct and indirect use of mangrove forest ecosystems. The research results showed that the mangroves found mainly consisted of 5 types i.e. Avicennia marina, Rhizophora apculata, Rhizophora mucronata, Rhizophora stylos, and Bruguiera cylindrica. The total economic value of mangrove forests in the Sari Ringgung area, Pesawaran Regency is IDR 109,953,256,105, which consists of the use value ofIDR 46,855,529,425 and the non-use value of IDR 888,172,548. The use value consists of a direct use value of IDR 138,060,000 and an indirect use value of 46,717,469,425, while the non-use value consists of an existence value of 874,366,548, an option value of 62,209,554,132 and a value of 13,806,000. The total economic value of the mangrove forests was in the high-value category, although the area of mangrove forests in Sari Ringgung and Pesawaran Regency has decreased.

Supply and demand behaviors in the Chinese emission allowances pledge credit market under different value type: An evolutionary game analysis

Chinese Emission Allowances (CEAs) pledge credit provides a new way for banks to reduce green credit risks and for low-carbon enterprises to improve the credit availability. However, insufficient supply and demand is the main dilemma of CEAs pledge credit in China. One of the reasons for this dilemma may be the neglect of the forward value of CEAs in value assessment. This research explores the decision-making behavior of the supply and demand subjects in the CEAs pledge credit market under different value types of CEAs. First, the improved B–S options pricing model with consideration of transaction costs is used in the construction of the payoff matrix to measure the option value of CEAs. The new matrix aims to place both the option value (corresponding to forward value) and the market value (corresponding to spot value) in the CEAs pledge value evaluation framework. Then, based on the new matrix, an evolutionary game model between key emission enterprises (KEEs) and commercial banks (CBs) is built to dynamically analyze the equilibrium state of supply and demand as well as the strategic interaction of participants in CEAs pledge credit market. Finally, numerical simulations demonstrate the driving factors of supply and demand for CEAs pledge credit. The research results show that compared to market value, the option value of CEAs is more conducive to stimulating the supply and demand of CEA pledge credit; and the shorter the remaining valid period of CEAs, the higher the participation enthusiasm of supply and demand parties. Furthermore, reducing low-carbon technology risks and increasing the carbon emissions trading prices at the end of pledge period can significantly improve the supply and demand of CEAs pledge credit, but the loan and deposit interest rates of CEAs pledge credit are ineffective.

Advertising investments on television: real option estimation through Markov chains

We propose the valuation of a real option in the telecommunications industry. According to the probabilistic present worth approach, we estimate the value of a contract between a television network and a company willing to advertise its business on this network. We assume that the value of the contract depends on a time-dependent variable, i.e., the number of viewers tuned into the network, which behaves like a Markov process. After discretizing and converting this number into a monetary value through a specific function, we compute the nth-order moment of the total discounted earnings. The knowledge of the moments, and the application of the maximum-entropy approach, allows to find the probability distribution of the payoff function and the consequential pricing of the real option. Finally, we apply the proposed model to the real television audience data.

Option pricing with dynamic conditional skewness

AbstractIn this paper, we develop a discrete‐time affine option‐pricing model that explicitly incorporates the dynamics of conditional skewness. The new proposed model features different dynamics for conditional skewness and variance. To stress the difference in information, we use alternative realized measures constructed from high‐frequency historical returns to update skewness and variance dynamics. By Fourier inversion, we derive closed‐form option valuation formulas. Empirically, the flexibility that the model offers for conditional skewness as well as high‐frequency information from the underlying asset contribute to superior performance upon benchmark models using S&amp;P 500 index options. Overall, the joint modeling of dynamic conditional skewness and realized measures leads to an out‐of‐sample gain of 12.25% in pricing accuracy. The improvements are more pronounced for deep in‐the‐money calls, options with shorter maturities, and during highly volatile periods.

Audio

Audio

Heterogeneity in the effects of uncertainty shocks on labor market dynamics and extensive vs. intensive margins of adjustment

The real option value theory posits that non-convex adjustment costs pertaining to a firm's input are central to comprehending the consequences of increased uncertainty. This paper leverages the diversity observed at both sectoral and country levels in the degree of irreversibility associated with hiring and firing, a critical factor generating what is commonly referred to as “wait-and-see” behavior in times of heightened uncertainty. Our empirical findings reveal two key insights. First, in alignment with the concept of second-moment shocks, uncertainty shocks predominantly influence the labor market through the extensive margin rather than the intensive margin. Second, the effects of uncertainty shocks exhibit pronounced heterogeneity across countries and industries, and the adverse employment effects (extensive margin) are amplified in a country with strict employment protection or in an industry characterized by a higher natural layoff rate, consistent with the real option theory.