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

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 st...

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Bibliographic Details
Published in:Sustainability 2020-04, Vol.12 (8), p.3451
Main Authors: Morreale, Azzurra, Mittone, Luigi, Vu, Thi-Thanh-Tam, Collan, Mikael
Format: Article
Language:English
Subjects:
Behavior
business development
decision analysis
Decision making
Decision theory
economic activity
Experiments
Flexibility
Inter-temporal decision-making
Investment
Investment decision-making
Laboratories
Laboratory experiment
Net present value
organizational framework
Put & call options
Real options
Sustainability
sustainable development
theoretical study
Theory
Uncertainty
Valuation
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Summary: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.
ISSN:2071-1050
2071-1050
DOI:10.3390/su12083451