Faustmann vs. real options theory – An experimental investigation of foresters’ harvesting decisions

Abstract

JEL classification: Q23 C93 D22 Q28 Keywords: Experimental economics Forest harvesting decision Real options approach Faustmann-Pressler-Ohlin theorem Risk attitude Forest management Policy support a b s t r a c tAmong the most complex decisions in forestry is the decision of when to harvest a stand. Many investment theories have been established and adjusted to maximize profit, yet limited knowledge is available regarding the predictive power of theories. Understanding foresters' harvesting behavior, however, is important for forest management and policy support. Thus, the question arises as to what extent risky harvesting decisions comply with economic theories. Therefore, we conduct an incentive-based economic experiment with 107 forestry decision makers in order to analyze this research question. This approach is well-established in the field of behavioral economics since it has the advantage of analyzing certain economic parameters isolated from further aspects of the decision situation. We use the Faustmann-Pressler-Ohlin theorem and a real options approach as normative benchmarks. The present study provides evidence that none of the examined theories fully comply with the observed behavior. However, the harvesting behavior coincides significantly more with the real options theory than with the Faustmann-Pressler-Ohlin theorem. It can thus be stated that a higher degree of education leads to decisions that are more in accordance with the real options theory.

Adaptation to Climate Change in Forestry: A Multiple Correspondence Analysis (MCA)

“…Furthermore, uncertainties related to climate change are numerous with regard to the implications of climate change, alternative management, the timber market, and the expert advice provided by forest consultants [38]. The measurement of forest owner's preferences towards risk is very recent [39][40][41]. These papers utilized methodologies adapted from behavioral economics and proposed a quantification of the forest owner's parameter of risk aversion.…”

“…These papers utilized methodologies adapted from behavioral economics and proposed a quantification of the forest owner's parameter of risk aversion. They show that this parameter is important when dealing with timing in sales decision [40] and harvesting decision [40,41]. Such measurement under uncertainty for a population of forest owners has never been carried out.…”

Pertinence of reactive, active, and robust adaptation strategies in forest management under climate change

“…Risk-seeking decisionmakers may stick to the BAU strategy and avoid adaptation in the hope of either non-realization of climate change at all or a climate change realization with low impacts on their forests. However, forest decision-makers are mostly risk-averse (Sauter et al 2016;Petucco et al 2015) and would select an adaptation strategy. Selection of the most suitable adaptation strategy is dependent on the costs and benefits estimated from the implementation of adaptation.…”

Investing in climate change adaptation and mitigation: A methodological review of real-options studies

“…Milanesi et al ( 2014 ) proposed a Fuzzy payoff model for the analysis of forest establishment investment and showed that some positive option value would be ignored if the investment was evaluated using the traditional NPV approach. Sauter et al ( 2016 ) conducted an economic experiment testing whether harvesting decisions reflected the predictions of the Faustmann rule rather than the real-options approach. They found that farmers seem relatively more inclined towards following a timing rule accounting for the presence of an option value.…”