An Experimental Study On Real Option Strategies

Mei Wang, Abraham Bernstein and Marc Chesney
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Mei Wang: University of Zurich and Swiss Finance Institute
Abraham Bernstein: University of Zurich
Marc Chesney: University of Zurich and Swiss Finance Institute

No 09-48, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We conduct a laboratory experiment to study whether people in- tuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make pro- duction decisions in response to a simulated mean-reverting oil price. Using cluster analysis, participants can be classified into four groups, which we label as "mean-reverting,"Brownian motion real-option," "Brownian motion myopic real-option," and "ambiguous." We find two behavioral biases in the strategies by our participants: ignoring the mean-reverting process, and myopic behavior. Both lead to too frequent switches when compared with the theoretical benchmark. We also find that the last group behaves as if they have learned to incorpo- rating the true underlying process into their decisions, and improved their decisions during the later stage.

Keywords: Real Option; Experimental Economics; Heterogeneity. (search for similar items in EconPapers)
JEL-codes: C91 D84 G11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2009-12
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0948

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