Agile software development (ASD) increases project flexibility. While the induced real option values (ROVs) are widely discussed in information technology (IT) literature and used for project management (PM) decisions in practice, behavioural deformations as discussed in naturalistic decision making (NDM) theory such as overoptimism or an escalation of commitment might mislead PM e.g. to abandon unsuccessful projects later than rationally appropriate. Hence, the impact of imperfect, noisy information about the project and behavioural shortcomings should be anticipated in project decisions by adjusting ROVs. However, while behavioural finance gains much momentum, there is no correspondence to that in IT research. Therefore, this paper provides following design science research (1) basic concepts of NDM that should be included in IT project valuation, (2) a base for modelling behaviourally induced consequences for project investment valuation in a multiperiod setting, (3) for illustration a simulation study with a sequence of abandonment options in ASD and (4) recommendations for PM how to integrate behavioural deformations in real life decisions. It therefore contributes to descriptive and prescriptive decision and PM theory as well.
Baumeister, Alexander and Ilg, Markus, "Real Options in Agile Software Development: Handling the Paradox of Flexibility and Behavioural Stickiness in Project Valuation" (2018). Research-in-Progress Papers. 13.