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.