Value of Flexibility in a Finite Horizon Decision Process

Leonardo Santiago, Pirooz Vakili

Research output: Contribution to journalConference article in journalResearchpeer-review


Motivated by a model of decision processes of R&D projects, we consider a finite horizon Markov decision process. In this context the difference between the value under active control (when the process is optimally controlled) and under passive control (when the control at each stage is a default control) is called the value of flexibility. We analyze the impact of increased variability of the terminal payoff on the value of flexibility and the optimal value of the project and show that the impact of increased variability on the passive project can be used to determine the impact of increased variability on the optimally controlled project.
Original languageEnglish
JournalProceedings of the IEEE Conference on Decision & Control
Pages (from-to)1319 - 1324
Publication statusPublished - 2004
Externally publishedYes

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