Risky choices in strategic environments: An experimental investigation of a real options game

Managers frequently make decisions under conditions of fundamental uncertainty due the stochastic nature of the outcomes and competitive rivalry. In this study, we experimentally test a theoretical model under fundamental uncertainty and competitive rivalry by designing a sequential interaction game between two players. The first mover can decide either to choose a sure outcome that assigns a risky outcome to the second mover or to pass the decision to the second mover. If the second player gets the chance to decide, she can choose between a sure outcome, conditioned by the assignment of a risky payoff to the first mover, or the sharing of the risky outcome with the first mover. We then introduce the following experimental treatments: (i) relegating second-mover participants to a purely passive role and substituting them with a random device (absence of strategic uncertainty – that is, when the source of uncertainty is a human subject); (ii) providing information about the behaviour of second-mover counterparts; and (iii) completely removing the second-mover participant.