An experimental study on real-options strategies |
| |
Authors: | Mei Wang Abraham Bernstein Marc Chesney |
| |
Affiliation: | 1. WHU-Otto Beisheim School of Management , Burgplatz 2, 56179 Vallendar , Germany mei.wang@whu.edu;3. Department of Informatics , University of Zurich , Zurich , Switzerland;4. Institute of Banking and Finance (IBF) and Swiss Finance Institute , University of Zurich , Plattenstrasse 32, 8032 Zurich , Switzerland |
| |
Abstract: | We conduct a laboratory experiment to study whether people intuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make production decisions in response to a simulated mean-reverting oil price. Using cluster analysis, participants can be classified into four groups, which we label ‘mean-reverting’, ‘Brownian motion real-option’, ‘Brownian motion myopic real-option’, and ‘ambiguous’. We find two behavioral biases in the strategies of 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 behaved as if they have learned to incorporate the true underlying process into their decisions, and improved their decisions during the later stage. |
| |
Keywords: | Behavioral finance Real Options Experimental finance Laboratory experiments Bound rationality Dynamic models |
|
|