IDEAS home Printed from https://ideas.repec.org/a/abk/jajeba/ajebasp.2011.473.478.html
   My bibliography  Save this article

Real Option Method and Escalation of Commitment in the Evaluation of Investment Projects

Author

Listed:
  • Mehrdad Karami
  • Farshid Ahmadi Farsani

Abstract

Problem statement: This study applies an experimental method to find out whether using the real option method along with the discounted cash flow techniques can reduce the decision-makers’ Escalation of Commitment (EC hereafter) or their desire to keep up their commitment to a failed project. Approach: The real option method used for the evaluation of long-term projects also measures the flexibility value which may be produced during the implementation of the project. Results: The results indicate that those who use the real option method show lower EC to a failed project than those who merely use the net present value method. Conclusion/Recommendations: The major conclusion might be that using the real option method in capital budgeting can affect the users’ behavior and decisions and lead to better decision-making in the long-term projects. In view of the fact that long-term investment projects are costly and time-consuming, a greater need is felt for better methods of evaluating such projects and, in consequence, researchers should also consider the other affective aspects of using real method options on the users' behavior and decisions.

Suggested Citation

  • Mehrdad Karami & Farshid Ahmadi Farsani, 2011. "Real Option Method and Escalation of Commitment in the Evaluation of Investment Projects," American Journal of Economics and Business Administration, Science Publications, vol. 3(3), pages 473-478, September.
    • Handle: RePEc:abk:jajeba:ajebasp.2011.473.478
    DOI: 10.3844/ajebasp.2011.473.478
    as

    Download full text from publisher

    File URL: https://thescipub.com/pdf/ajebasp.2011.473.478.pdf
    Download Restriction: no
    File URL: https://thescipub.com/abstract/ajebasp.2011.473.478
    Download Restriction: no
    File URL: https://libkey.io/10.3844/ajebasp.2011.473.478?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. He, Xin & Mittal, Vikas, 2007. "The effect of decision risk and project stage on escalation of commitment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 103(2), pages 225-237, July.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Sleesman, Dustin J., 2019. "Pushing through the tension while stuck in the mud: Paradox mindset and escalation of commitment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 155(C), pages 83-96.
    2. Hoon S. Choi & Darrell Carpenter & Myung S. Ko, 2022. "Risk Taking Behaviors Using Public Wi-Fi™," Information Systems Frontiers, Springer, vol. 24(3), pages 965-982, June.
    3. Hermano, Víctor & Martín-Cruz, Natalia, 2016. "The role of top management involvement in firms performing projects: A dynamic capabilities approach," Journal of Business Research, Elsevier, vol. 69(9), pages 3447-3458.
    4. Yonatan Shertzer & Yael Brender-Ilan, 2023. "Why Do Leaders Escalate Their Commitment to a Failed Course of Action? A Moderated-Mediation Personality Traits Model," SAGE Open, , vol. 13(1), pages 21582440231, February.
    5. Hamza Fadhila & Azouzi Mohamed Ali & Jarboui Anis, 2014. "Governance mechanisms, managerial’s commitment bias and firm’s investment decision escalation: Failure of firm?s crises communication: Bayesian network method," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 4(2), pages 125-149, February.
    6. Fadhila HAMZA & Anis JARBOUI, 2012. "Investor’s Commitment Bias and Escalation of Firm’s Investment Decision," Economia. Seria Management, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 15(2), pages 327-345, December.
    7. Desmond Lam & Bernadete Ozorio, 2013. "The effect of prior outcomes on gender risk-taking differences," Journal of Risk Research, Taylor & Francis Journals, vol. 16(7), pages 791-802, August.
    8. Golmohammadi, Alireza & Mattila, Anna S. & Gauri, Dinesh K., 2020. "Negative online reviews and consumers’ service consumption," Journal of Business Research, Elsevier, vol. 116(C), pages 27-36.
    9. Alejandro Montecinos‐Pearce & Pablo Rodrigo & Ignacio J. Duran, 2020. "When is escalation of commitment unstoppable in group settings? An iterative economic modeling approach to unveil the dark side of group decision‐making," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 41(8), pages 1387-1402, December.
    10. Sivanathan, Niro & Molden, Daniel C. & Galinsky, Adam D. & Ku, Gillian, 2008. "The promise and peril of self-affirmation in de-escalation of commitment," Organizational Behavior and Human Decision Processes, Elsevier, vol. 107(1), pages 1-14, September.
    11. Xiaoyang Long & Javad Nasiry & Yaozhong Wu, 2020. "A Behavioral Study on Abandonment Decisions in Multistage Projects," Management Science, INFORMS, vol. 66(5), pages 1999-2016, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:abk:jajeba:ajebasp.2011.473.478. See general information about how to correct material in RePEc.

    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 CitEc recognized a bibliographic reference but did not link an item in RePEc 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 RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Jeffery Daniels (email available below). General contact details of provider: https://thescipub.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.