TY - GEN

T1 - Value of Flexibility in a Finite Horizon Decision Process

AU - Santiago, Leonardo

AU - Vakili, Pirooz

N1 - CBS Library does not have access to the material

PY - 2004

Y1 - 2004

N2 - 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.

AB - 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.

U2 - 10.1109/CDC.2004.1430225

DO - 10.1109/CDC.2004.1430225

M3 - Conference article in journal

VL - 2

SP - 1319

EP - 1324

JO - Proceedings of the IEEE Conference on Decision and Control

JF - Proceedings of the IEEE Conference on Decision and Control

SN - 0743-1546

ER -