Flexibility and the Demand for Risky Assets

To a decisionmaker facing a choice over a set of risky prospects the issue of ‘flexibility’, i.e., the ability to postpone other decisions until after the uncertainty is resolved, is a crucial one. Tisdell (1963) for example, has shown that the well known ‘preference’ of a risk neutral firm for random over constant prices (with the same mean) reduces to indifference when it is assumed that the firm must make its production decisions before the random prices are realized. In the literature, risky prospects which are due to be resolved before any other decisions must be made are known as ‘timeless’ prospects and prospects which are due to be resolved only after (some) such decisions must be made are known as ‘temporal’ prospects. ’