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

Azzurra Morreale, Luigi Mittone, Thi-Thanh-Tam Vu and Mikael Collan
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Azzurra Morreale: School of Business and Management, LUT University, 53850 Lappeenranta, Finland
Thi-Thanh-Tam Vu: School of Business and Management, LUT University, 53850 Lappeenranta, Finland

Sustainability, 2020, vol. 12, issue 8, 1-19

Abstract: 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.

Keywords: investment decision-making; uncertainty; inter-temporal decision-making; real options; laboratory experiment (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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