Via Tyler Cowen, this paper:
An Option Value Problem from Seinfeld∗
by
Avinash Dixit, Princeton University
June 12, 2010
Abstract
This is a paper about nothing.
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∗ I developed this model many years ago, but kept it hidden because it seemed too politically incorrect. I hope that my advanced age now exempts me from the constraints of political correctness.
I thank Ricardo Guzmán for his abstract suggestion.
And from the Introduction:
In an episode of the sitcom Seinfeld, Elaine Benes uses a contraceptive sponge that gets taken off the market. She scours pharmacies in the neighborhood to stock a large supply, but it is finite. So she must “re-evaluate her whole screening process.” Every time she dates a new man, which happens very frequently, she has to consider a new issue: Is he “spongeworthy”? The purpose of this article is to quantify this concept of spongeworthiness.
When Elaine uses up a sponge, she is giving up the option to have it available when an even better man comes along. Therefore using the sponge amounts to exercising a real option to wait, and spongeworthiness is an option value. It can be calculated using standard option-pricing techniques. However, unlike the standard theory of financial or many real options, there are no complete markets and no replicating portfolios. Stochastic dynamic programming methods must be used.
After just playing a round of "Sponge Bob Go Fish" cards with my 5-year-old, I now have a very disturbing image for the phrase "Sponge Worthy"!
Posted by: Eric Fink | July 13, 2010 at 07:03 PM