Start Date

12-13-2015

Description

Real Option Valuation (ROV) has been proposed as a way to manage high risk IT projects by accounting for managerial decision flexibility. Evidence suggests that due to the complexity involved in ROV, it is, utilized intuitively by professionals, in the form of “Real Option Thinking”. Further, Real Option Thinking is subject to various judgmental biases. In this study, we build a case for real options exercise decisions’ vulnerability to biased decision making. Considering the two distinctive schools of thoughts regarding the determinants of risky decision making in organizations (individual characteristics vs. Prospect Theory), we build competing hypotheses regarding whether real option exercise decisions are biased due to risk attitudes of the individuals involved. We also present a methodology to test these hypotheses.

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Dec 13th, 12:00 AM

Risk Attitudes and Real Option Exercise Decisions in IT Projects

Real Option Valuation (ROV) has been proposed as a way to manage high risk IT projects by accounting for managerial decision flexibility. Evidence suggests that due to the complexity involved in ROV, it is, utilized intuitively by professionals, in the form of “Real Option Thinking”. Further, Real Option Thinking is subject to various judgmental biases. In this study, we build a case for real options exercise decisions’ vulnerability to biased decision making. Considering the two distinctive schools of thoughts regarding the determinants of risky decision making in organizations (individual characteristics vs. Prospect Theory), we build competing hypotheses regarding whether real option exercise decisions are biased due to risk attitudes of the individuals involved. We also present a methodology to test these hypotheses.