Real options in the laboratory: An experimental study of sequential investment decisions

Murphy, Ryan O.; Andraszewicz, Sandra; Knaus, Simon

doi:10.1016/j.jbef.2016.08.002

Cited by 8 publications

(9 citation statements)

References 33 publications

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“…This stage is designed to mandate the subjects to exert effort to earn an endowment for the next stage-the logic is that this task should trigger the participants to perceive the ECU as legitimately earned (asset legitimacy), and not as a sort of wind-fall gift without a true value. Here we depart from the previous experimental studies [21,24], in which the endowment was given to the subjects by the experimenters without inducing any kind of asset legitimacy. Prior research in experimental economics has provided evidence that the origin of the endowment (earned vs. windfall) may influence subject behavior (see, [32]).…”

Section: Stage 1: Real-effort Taskmentioning

confidence: 99%

“…The results confirm most of the theoretical predictions. Murphy et al [24] investigated investment decision-making in a dynamic real option setting, and found that participants' behavior is not in line with the predictions of real option theory. Morreale et al [25] studied investment decision-making under stochastic (fundamental) uncertainty and under human-related (strategic) uncertainty, and found that theory-based expectations are met to a higher degree in the absence of strategic uncertainty due to an observed "disutility of loss-of-control" bias.…”

Section: Introductionmentioning

confidence: 99%

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To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

Morreale

Mittone

et al. 2020

Sustainability

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Business sustainability and real options are closely connected, as real options are managerial flexibility that allows organizations to adapt to changes in their environment, thus making the organization more robust and economically sustainable. Studies in real options theory abound, yet there is still a lack of evidence on whether people make decisions consistently with the predictions made by real options models. We run a laboratory experiment to study the role of option value and the laboratory time required to resolve uncertainty in individuals' decision to price and adopt an option to wait. Specifically, we compare decision makers' choices in two investment scenarios: One with a short time to maturity (implying a low option value), and another with a longer time to maturity (implying a high option value). In the lab, both scenarios are implemented with the waiting time of twenty and sixty minutes. Our results show that decision makers deviate from the theoretical predictions, recognizing the benefit of waiting, when the value of the option is higher, or when the waiting time is shorter. Our study does not only bring more insights into real options adoption at the individual level, but also emphasizes the great potential of behavioral and experimental approach to bridge the gap between theory and practice in the real options literature.

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Section: Stage 1: Real-effort Taskmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

Morreale

Mittone

et al. 2020

Sustainability

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“…All relevant variables are not only observable but also controllable" (Oprea et al, 2009(Oprea et al, , p. 1103. Accordingly, during the last decade researchers have used laboratory experiments to study the behavioural aspects of managing real options (Anderson, Friedman, & Oprea, 2010;Miller and Shapira (2004); Murphy et al, 2016;Oprea et al, 2009;Yavas & Sirmans, 2005).…”

Section: Related Literaturementioning

confidence: 99%

“…In these studies, a decision maker decides, either over discrete periods (Murphy et al, 2016;Yavas & Sirmans, 2005) or continuously (Anderson et al, 2010;Oprea et al, 2009), whether to trade a sure alternative or to choose a risky option with potentially higher value. Specifically, Miller and Shapira (2004) required their participants to indicate the price to sell or to buy a call or put option for binary lotteries.…”

Section: Related Literaturementioning

confidence: 99%

“…Moreover, when the main parameters that influence the stochastic value are altered, subjects are more likely to behave according to the predicted direction in monopoly rather than in competitive environments. In the study by Murphy et al (2016), a decision maker had to choose how much to invest in a risky environment that evolved over time. Their experimental results differed from the theoretical predictions.…”

Section: Related Literaturementioning

confidence: 99%

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Risky choices in strategic environments: An experimental investigation of a real options game

Morreale

Mittone

Nigro

2019

European Journal of Operational Research

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Managers frequently make decisions under conditions of fundamental uncertainty due the stochastic nature of the outcomes and competitive rivalry. In this study, we experimentally test a theoretical model under fundamental uncertainty and competitive rivalry by designing a sequential interaction game between two players. The first mover can decide either to choose a sure outcome that assigns a risky outcome to the second mover or to pass the decision to the second mover. If the second player gets the chance to decide, she can choose between a sure outcome, conditioned by the assignment of a risky payoff to the first mover, or the sharing of the risky outcome with the first mover. We then introduce the following experimental treatments: i) relegating second-mover participants to a purely passive role and substituting them with a random device (absence of strategic uncertaintythat is, when the source of uncertainty is a human subject); ii) providing information about the behaviour of second-mover counterparts; and iii) completely removing the second-mover participant. We find that decision makers are sensitive to the presence or absence of strategic uncertainty; indeed, in the presence of strategic uncertainty, first movers more often diverge from the behaviour predicted by the model. Given our experimental results, the theoretical model needs to be revisited. The standard model of monetary payoff-maximizing agents should be substituted by one of decision makers who maximize a utility function which includes the psychological cost induced by strategic uncertainty.

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Individual antecedents of real options appraisal: The role of national culture and ambiguity

Driouchi

Trigeorgis

2020

European Journal of Operational Research

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Real options in the laboratory: An experimental study of sequential investment decisions

Cited by 8 publications

References 33 publications

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

Risky choices in strategic environments: An experimental investigation of a real options game

Individual antecedents of real options appraisal: The role of national culture and ambiguity

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