The Option Value of Sponge Worthiness

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. 

 

Comments

[Eric Fink]

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"!