Academic

The Option Value of Sponge Worthiness

By Kim Krawiec

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 o? the market. She scours pharmacies in the neighborhood to stock a large supply, but it is ?nite. 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 ?nancial or many real options, there are no complete markets and no replicating portfolios. Stochastic dynamic programming methods must be used. 

Full post as published by The Faculty Lounge on July 11, 2010 (boomark / email).