Do People Disinvest Optimally?

John D Hey and Konstantina Mari ()

Discussion Papers from Department of Economics, University of York

Abstract: The disinvestment decision is of importance in many contexts: if funds are tied up for too long in a poorly-performing project, then opportunities for re-investment may be missed. Optimal disinvestment theory is a component of real options theory, but is relatively ignored by experimentalists. Two recent papers conclude that decision-makers stay in projects longer than that prescribed by the optimal behaviour of a risk-neutral agent. This departure is explained through riskaversion, but without a formal hypothesis under test. We report here on an experiment which explains the behaviour of the subjects through an estimationof risk-aversion. We also explore an alternative hypothesis – that subjects are myopic. Our results show that few subjects appear to be risk-neutral, many seem to be risk-averse but few are myopic.

Keywords: disinvestment; experiments; myopia; real options; risk-aversion; rolling horizon (search for similar items in EconPapers)
JEL-codes: C9 G02 (search for similar items in EconPapers)
Date: 2015-08
New Economics Papers: this item is included in nep-cbe, nep-exp, nep-ppm and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:yor:yorken:15/13

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