Decision, Risk, and Operations Insights @ CBS

There is a large body of work that documents a strong, positive correlation between education and measures of health, but little is known about the mechanisms by which education might affect health. One possibility is that more educated individuals are more likely to adopt new medical technologies. We investigate this theory by asking whether more educated people are more likely to use newer drugs, while controlling for other individual characteristics, such as income and insurance status.

This paper describes a practical algorithm based on Monte Carlo simulation for the pricing of multi-dimensional American (i.e., continuously exercisable) and Bermudan (i.e., discretely-exercisable) options. The method generates both lower and upper bounds for the Bermudan option price and hence gives valid confidence intervals for the true value. Lower bounds can be generated using any number of primal algorithms.

No one has derived closed-form solutions for consumption with stochastic labor income and constant relative risk aversion utility. A numerical technique is used here to give an accurate approximation to the solution. The resulting consumption function is often dramatically different than the certainty equivalence solution typically used, in which consumption is proportional to the sum of financial wealth and the present value of expected future income.