An Optimal Stopping Problem for an Investing Firm

Abstract

The information on the costs, benefits and opportunities is an essential tool for the study of real options in firms that make large investments.We study investment decisions regarding disruptive economies. The real options logic is unsuitable for single-investment events, which are becoming frequent in this type of economies. We propose a strategy for a firm seeking to invest in the very best technology among a sequence of opportunities. If the choice is not the best, the invested capital will be lost. The yield will depend on whether the chosen option is the best and on the investment. Our analysis shows that the optimal strategy for the investing firm is to invest a specific capital in the relatively best option after a threshold which depends on the number of opportunities.