Real Options: Experimental Evidence

Abdullah Yavas () and C. Sirmans ()

The Journal of Real Estate Finance and Economics, 2005, vol. 31, issue 1, 27-52

Abstract: Empirical testing of the real options theory has been very limited. This is primarily due to various inherent problems with obtaining field data for many components of real options theory. This paper utilizes experimental methodology to generate the data. The advantage of the experimental approach is that it enables the investigator to generate reliable and replicable data in a controlled environment. The results of the experiment indicate that fundamental insights of real options theory are not evident to individual investors. The majority invested too early and thus failed to recognize the benefit of the option to wait. However, when the investors had to compete with others for the right to invest, their bids generally reflected the value of the embedded option. Furthermore, as predicted by the theory, their bids increased with greater uncertainty about future cash flows from the investment. Copyright Springer Science + Business Media, Inc. 2005

Keywords: real options; experimental modeling; real estate investment; investment timing (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (33)

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DOI: 10.1007/s11146-005-0992-6

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The Journal of Real Estate Finance and Economics is currently edited by Steven R. Grenadier, James B. Kau and C.F. Sirmans

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