The Value of Information in Stopping Problems

Abstract

We consider stopping problems in which a decision maker (DM) faces an unknown state of nature and decides sequentially whether to stop and take an irreversible action; pay a fee and obtain additional information; or wait without acquiring information. We discuss the value and quality of information. The former is the maximal discounted expected revenue the DM can generate. We show that among all history-dependent fee schemes, the upfront scheme (as opposed, for instance, to pay-for-use) is optimal: it generates the highest possible value of information. The effects on the optimal strategy of obtaining information from a more accurate source and of having a higher discount factor are distinct, as far as expected stopping time and its distribution are concerned. However, these factors have a similar effect in that they both enlarge the set of cases in which the optimal strategy prescribes waiting.