Cautious Stochastic Choice, Optimal Stopping and Deliberate Randomisation

We study Cautious Stochastic Choice (CSC) agents facing optimal timing decisions in a dynamic setting. In an expected utility context, the optimal strategy is always a threshold strategy. In the CSC setting, the investor has a... [ view full abstract ]

We study Cautious Stochastic Choice (CSC) agents facing optimal timing decisions in a dynamic setting. In an expected utility context, the optimal strategy is always a threshold strategy. In the CSC setting, the investor has a family of utility functions and is concerned with the worst case certainty equivalent. We show that the optimal strategy may be of non-threshold form and may involve randomisation. Our model is consistent with recent experimental evidence in dynamic setups whereby individuals do not play cut-off or threshold strategies.