Speed, Accuracy and Caution: the Timing of Choices Under Risk Aversion
Abstract:
A large empirical literature on the timing of binary choices documents that quicker decisions are often more accurate, even when subjects know the quality of both available options. This evidence suggests individuals decrease the standards with which they make decisions over time, at odds with the classic sequential testing model in which optimal standards are time-independent. We use a novel approximation technique to show that incorporating risk aversion can account for time-dependent standards. We find sufficient conditions for standards to be decreasing for a family of utility functions. Our technique sidetracks many of the difficulties in solving non-stationary optimal stopping problems and allows us to partially characterize the optimal boundaries.