Abstract

Real options theory has been advocated as a solution to IT investment problems with uncertainty around future outcomes and the inability of traditional financial measures to account for managerial flexibility. On the one hand, it is argued that real option analysis captures and formalizes managers’ intuition, thus creating a disciplined decision making process. On the other hand, the intuitive valuation of the options is criticized due to the prevalent effects of various judgmental biases. Through this study, we try to capture one of the biases that can affect the real option value at exercise time in an IT application portfolio setting i.e. narrow framing. We also explore the impact of uncertainty around outcomes on real option exercise time. By conducting an online experiment using experimental choice analysis with IT managers as subjects, we try to see if they are prone to simplifying complicated real option exercise decisions by isolating them.

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