With declining probabilities of success, the optimal-stopping strategy is to:
A) continue to invest until the venture becomes successful.
B) continue investing till sunk cost of investment is equal to zero.
C) not invest in the project at all.
D) discontinue investing when the expected profit is zero.
E) invest once in pursuit of commercial success and then discontinue investing.

Question

Quizplus · Accepted Answer

Optimal-stopping strategy suggests that one should stop investing in a project when the expected profit is zero or negative. This means that the costs of further investment outweigh the potential benefits. In the given scenario, since the probabilities of success are declining, it is likely that the expected profit will become zero at some point. Therefore, the optimal-stopping strategy is to discontinue investing when the expected profit is zero. This minimizes the risk of incurring further losses.

With Declining Probabilities of Success, the Optimal-Stopping Strategy Is To