Holding on for too long? An experimental study on inertia in entrepreneurs’ and non-entrepreneurs’ disinvestment choices
AbstractDisinvestment, in the sense of project termination and liquidation of assets including the cession of a venture, is an important realm of entrepreneurial decision-making. This study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non-entrepreneurs. Our experimental results reject the standard net present value approach as an account of observed behavior. Instead, most individuals seem to understand the value of waiting. Their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning. We also observe a pronounced ‘psychological inertia’, i.e., most individuals hold on to a losing project for even longer than real options reasoning would predict. The study provides evidence for entrepreneurs and non-entrepreneurs being quite similar in their behavior.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Humboldt University Berlin, Department of Agricultural Economics in its series Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers with number 59518.
Date of creation: Jan 2010
Date of revision:
Contact details of provider:
Postal: Philippstr. 13, 10115 Berlin
Phone: +49 (0)30 2093 6305
Fax: +49 (0)30 2093 6497
Web page: http://www.agrar.hu-berlin.de/fakultaet/departments/daoe
More information through EDIRC
Real-Options; Disinvestment; Exit Behavior; Experimental Economics; Agribusiness; Agricultural and Food Policy; Agricultural Finance; Institutional and Behavioral Economics;
Other versions of this item:
- Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
- NEP-ALL-2010-05-29 (All new papers)
- NEP-CBE-2010-05-29 (Cognitive & Behavioural Economics)
- NEP-ENT-2010-05-29 (Entrepreneurship)
- NEP-EXP-2010-05-29 (Experimental Economics)
- NEP-PPM-2010-05-29 (Project, Program & Portfolio Management)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Cooper, Arnold C. & Woo, Carolyn Y. & Dunkelberg, William C., 1988. "Entrepreneurs' perceived chances for success," Journal of Business Venturing, Elsevier, vol. 3(2), pages 97-108.
- Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
- Amos Tversky & Daniel Kahneman, 1979.
"Prospect Theory: An Analysis of Decision under Risk,"
Levine's Working Paper Archive
7656, David K. Levine.
- Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
- Bar-Eli, Michael & Azar, Ofer H. & Ritov, Ilana & Keidar-Levin, Yael & Schein, Galit, 2005.
"Action bias among elite soccer goalkeepers: The case of penalty kicks,"
4477, University Library of Munich, Germany.
- Bar-Eli, Michael & Azar, Ofer H. & Ritov, Ilana & Keidar-Levin, Yael & Schein, Galit, 2007. "Action bias among elite soccer goalkeepers: The case of penalty kicks," Journal of Economic Psychology, Elsevier, vol. 28(5), pages 606-621, October.
- Matthew Rabin & Ted O'Donoghue, 1999.
"Doing It Now or Later,"
American Economic Review,
American Economic Association, vol. 89(1), pages 103-124, March.
- Ted O'Donoghue & Matthew Rabin, 1996. "Doing It Now or Later," Discussion Papers 1172, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
- O'Donoghue, Ted & Rabin, Matthew, 1997. "Doing It Now or Later," Department of Economics, Working Paper Series qt7t44m5b0, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Ted O'Donoghue and Matthew Rabin ., 1997. "Doing It Now or Later," Economics Working Papers 97-253, University of California at Berkeley.
- Samuelson, William & Zeckhauser, Richard, 1988. " Status Quo Bias in Decision Making," Journal of Risk and Uncertainty, Springer, vol. 1(1), pages 7-59, March.
- O'Donoghue, Ted & Rabin, Matthew, 2000.
"Choice and Procrastination,"
Department of Economics, Working Paper Series
qt5r26k54p, Department of Economics, Institute for Business and Economic Research, UC Berkeley.
- Jonathan P. O'Brien & Timothy B. Folta & Douglas R. Johnson, 2003. "A real options perspective on entrepreneurial entry in the face of uncertainty," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 24(8), pages 515-533.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- Martin Barner & Francesco Feri & Charles R. Plott, 2005. "On the microstructure of price determination and information aggregation with sequential and asymmetric information arrival in an experimental asset market," Annals of Finance, Springer, vol. 1(1), pages 73-107, 01.
- Shefrin, Hersh & Statman, Meir, 1985. " The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence," Journal of Finance, American Finance Association, vol. 40(3), pages 777-90, July.
- Paddock, James L & Siegel, Daniel R & Smith, James L, 1988. "Option Valuation of Claims on Real Assets: The Case of Offshore Petroleum Leases," The Quarterly Journal of Economics, MIT Press, vol. 103(3), pages 479-508, August.
- Pindyck, Robert, 1989.
"Irreversibility, uncertainty, and investment,"
Policy Research Working Paper Series
294, The World Bank.
- Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
- Pindyck, Robert S., 1990. "Irreversibility, uncertainty, and investment," Working papers 3137-90., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Richard E. Caves, 1998. "Industrial Organization and New Findings on the Turnover and Mobility of Firms," Journal of Economic Literature, American Economic Association, vol. 36(4), pages 1947-1982, December.
- Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
- Kliemt, Hartmut, 2001. "Rationality and Reality," Kyklos, Wiley Blackwell, vol. 54(2-3), pages 309-16.
- KruegerJR, Norris F. & Reilly, Michael D. & Carsrud, Alan L., 2000. "Competing models of entrepreneurial intentions," Journal of Business Venturing, Elsevier, vol. 15(5-6), pages 411-432.
- Werner Güth & Hartmut Kliemt, 2004.
"Bounded Rationality and Theory Absorption,"
Papers on Strategic Interaction
2004-27, Max Planck Institute of Economics, Strategic Interaction Group.
- Henry, Claude, 1974. "Investment Decisions Under Uncertainty: The "Irreversibility Effect."," American Economic Review, American Economic Association, vol. 64(6), pages 1006-12, December.
- Martin Odening & Oliver Mu�hoff & Alfons Balmann, 2005. "Investment decisions in hog finishing: an application of the real options approach," Agricultural Economics, International Association of Agricultural Economists, vol. 32(1), pages 47-60, 01.
- Mathias Dewatripont & Gérard Roland, 1995.
"The design of reform packages under uncertainty,"
ULB Institutional Repository
2013/9607, ULB -- Universite Libre de Bruxelles.
- Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
- Daniel Kahneman & Jack L. Knetsch & Richard H. Thaler, 1991. "Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias," Journal of Economic Perspectives, American Economic Association, vol. 5(1), pages 193-206, Winter.
- Ritov, Ilana & Baron, Jonathan, 1992. " Status-Quo and Omission Biases," Journal of Risk and Uncertainty, Springer, vol. 5(1), pages 49-61, February.
- Selten, Reinhard, 1999. "What is Bounded Rationality? Paper prepared for the Dahlem Conferen," Discussion Paper Serie B 454, University of Bonn, Germany.
- Timothy J. Richards, 2004. "Slotting Allowances as Real Options: An Alternative Explanation," The Journal of Business, University of Chicago Press, vol. 77(4), pages 675-696, October.
- Abdullah Yavas & C. Sirmans, 2005. "Real Options: Experimental Evidence," The Journal of Real Estate Finance and Economics, Springer, vol. 31(1), pages 27-52, August.
- Sean M. Hackett & David M. Dilts, 2004. "A Real Options-Driven Theory of Business Incubation," The Journal of Technology Transfer, Springer, vol. 29(1), pages 41-54, 01.
- Ryan Oprea & Daniel Friedman & Steven T. Anderson, 2009. "Learning to Wait: A Laboratory Investigation," Review of Economic Studies, Oxford University Press, vol. 76(3), pages 1103-1124.
- Schade, Christian & Burmeister-Lamp, Katrin, 2009. "Experiments on Entrepreneurial Decision Making: A Different Lens Through Which to Look at Entrepreneurship," Foundations and Trends(R) in Entrepreneurship, now publishers, vol. 5(2), pages 81-134, March.
- Forbes, Daniel P., 2005. "Are some entrepreneurs more overconfident than others?," Journal of Business Venturing, Elsevier, vol. 20(5), pages 623-640, September.
- Ky�sti S. Pietola & Robert J. Myers, 2000. "Investment under Uncertainty and Dynamic Adjustment in the Finnish Pork Industry," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 82(4), pages 956-967.
- Jan Hinrichs & Oliver Musshoff & Martin Odening, 2008. "Economic hysteresis in hog production," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 333-340.
- Palich, Leslie E. & Ray Bagby, D., 1995. "Using cognitive theory to explain entrepreneurial risk-taking: Challenging conventional wisdom," Journal of Business Venturing, Elsevier, vol. 10(6), pages 425-438, November.
- Titman, Sheridan, 1985. "Urban Land Prices under Uncertainty," American Economic Review, American Economic Association, vol. 75(3), pages 505-14, June.
- Moshe Levy & Haim Levy, 2002. "Prospect Theory: Much Ado About Nothing?," Management Science, INFORMS, vol. 48(10), pages 1334-1349, October.
- Miljkovic, Dragan, 2000. "Optimal timing in the problem of family farm transfer from parent to child: an option value approach," Journal of Development Economics, Elsevier, vol. 61(2), pages 543-552, April.
- Arrow, Kenneth J & Fisher, Anthony C, 1974. "Environmental Preservation, Uncertainty, and Irreversibility," The Quarterly Journal of Economics, MIT Press, vol. 88(2), pages 312-19, May.
- Jonathan O'Brien & Timothy Folta, 2009. "Sunk costs, uncertainty and market exit: A real options perspective," Industrial and Corporate Change, Oxford University Press, vol. 18(5), pages 807-833, October.
- repec:feb:framed:00135 is not listed on IDEAS
- DeTienne, Dawn R., 2010. "Entrepreneurial exit as a critical component of the entrepreneurial process: Theoretical development," Journal of Business Venturing, Elsevier, vol. 25(2), pages 203-215, March.
- Odening, Martin & Musshoff, Oliver & Utesch, Volker, 2004. "Der Wechsel vom konventionellen zum Ã¶kologischen Landbau: Eine investitionstheoretische Betrachtung," German Journal of Agricultural Economics, Humboldt-Universitaet zu Berlin, Department for Agricultural Economics, vol. 53(6).
- Holm, Håkan J. & Opper, Sonja & Nee, Victor, 2013. "Entrepeneurs under Uncertainty: an Economic Experiment in China," Knut Wicksell Working Paper Series 2013/1, Knut Wicksell Centre for Financial Studies, Lund University.
- Appel, Franziska & Musshoff, Oliver, 2011. "How appropriate are myopic optimization models to predict decision behaviour: A comparison between agent-based models and business management games," 2011 International Congress, August 30-September 2, 2011, Zurich, Switzerland 115994, European Association of Agricultural Economists.
- Holm, Håkan J. & Opper, Sonja & Nee, Victor, 2012. "Entrepreneurs under Uncertainty: An Economic Experiment," Working Papers 2012:4, Lund University, Department of Economics.
- Cooper, David J. & Saral, Krista Jabs, 2010.
"Entrepreneurship and Team Participation: An Experimental Study,"
25144, University Library of Munich, Germany.
- Cooper, David J. & Saral, Krista Jabs, 2013. "Entrepreneurship and team participation: An experimental study," European Economic Review, Elsevier, vol. 59(C), pages 126-140.
- Artinger, Sabrina & Schade, Christian, 2013. "Girls will be Girls: An Experimental Study on Female Entrepreneurship," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 146511, Humboldt University Berlin, Department of Agricultural Economics.
- Schade, Christian & Snir, Avichai, 2012. "When the stress of quitting meets the cost of playing: An Experiment on to quit or not to quit?," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 134426, Humboldt University Berlin, Department of Agricultural Economics.
- Huettel, Silke & Narayana, Rashmi & Odening, Martin, 2011. "Measuring dynamic efficiency under uncertainty," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 129062, Humboldt University Berlin, Department of Agricultural Economics.
- Tubetov, Dulat & Musshoff, Oliver & Kellner, Ulla, 0. "Investments in Kazakhstani Dairy Farming: A Comparison of Classical Investment Theory and the Real Options Approach," Quarterly Journal of International Agriculture, Humboldt-Universität zu Berlin, vol. 51.
- Maart, Syster Christin & Musshoff, Oliver & Odening, Martin & Schade, Christian, 2010. "Zum Desinvestitionsverhalten Landwirtschaftlicher Unternehmer: Ergebnisse Einer Experimentellen Untersuchung," 50st Annual Conference, Braunschweig, Germany, September 29-October 1, 2010 93943, German Association of Agricultural Economists (GEWISOLA).
- Margarian, Anne, 2009. "The regional specifity of structural change in agriculture: An assessment of the role of farmers’ strategic behaviour on the land market," Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers 59522, Humboldt University Berlin, Department of Agricultural Economics.
- MuÃŸhoff, Oliver & Hirschauer, Norbert & Hengel, Philipp, 2011. "Sind Unternehmensplanspiele ein geeignetes Instrument zur Analyse begrenzter RationalitÃ¤t und tatsÃ¤chlichen Entscheidungsverhaltens?," Journal of International Agricultural Trade and Development, Journal of International Agricultural Trade and Development, vol. 60(3).
- Burmeister-Lamp, Katrin & Lévesque, Moren & Schade, Christian, 2012. "Are entrepreneurs influenced by risk attitude, regulatory focus or both? An experiment on entrepreneurs' time allocation," Journal of Business Venturing, Elsevier, vol. 27(4), pages 456-476.
- Iván Arribas & Penélope Hernández & Amparo Urbano Salvador & Jose E. Vila, 2012. "Are social and entrepreneurial attitudes compatible? A behavioral and self-perceptional analysis," Discussion Papers in Economic Behaviour 0512, University of Valencia, ERI-CES.
- Ihli, Hanna Julia & Maart, Syster Christin & Musshoff, Oliver, 2012. "Investment and Disinvestment in Irrigation Technology – An Experimental Analysis of Farmers’ Decision Behavior –," 2012 Annual Meeting, August 12-14, 2012, Seattle, Washington 124532, Agricultural and Applied Economics Association.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (AgEcon Search).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.