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To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

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  • Azzurra Morreale

    () (School of Business and Management, LUT University, 53850 Lappeenranta, Finland)

  • Luigi Mittone

    () (School of Business and Management, LUT University, 53850 Lappeenranta, Finland
    Department of Economics and Management, University of Trento, 38122 Trento, Italy)

  • Thi-Thanh-Tam Vu

    () (School of Business and Management, LUT University, 53850 Lappeenranta, Finland
    Department of Economics and Management, University of Trento, 38122 Trento, Italy
    International School, Vietnam National University, Hanoi 100000, Vietnam)

  • Mikael Collan

    () (School of Business and Management, LUT University, 53850 Lappeenranta, Finland)

Abstract

Business sustainability and real options are closely connected, as real options are managerial flexibility that allows organizations to adapt to changes in their environment, thus making the organization more robust and economically sustainable. Studies in real options theory abound, yet there is still a lack of evidence on whether people make decisions consistently with the predictions made by real options models. We run a laboratory experiment to study the role of option value and the laboratory time required to resolve uncertainty in individuals’ decision to price and adopt an option to wait. Specifically, we compare decision makers’ choices in two investment scenarios: One with a short time to maturity (implying a low option value), and another with a longer time to maturity (implying a high option value). In the lab, both scenarios are implemented with the waiting time of twenty and sixty minutes. Our results show that decision makers deviate from the theoretical predictions, recognizing the benefit of waiting, when the value of the option is higher, or when the waiting time is shorter. Our study does not only bring more insights into real options adoption at the individual level, but also emphasizes the great potential of behavioral and experimental approach to bridge the gap between theory and practice in the real options literature.

Suggested Citation

  • Azzurra Morreale & Luigi Mittone & Thi-Thanh-Tam Vu & Mikael Collan, 2020. "To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice," Sustainability, MDPI, Open Access Journal, vol. 12(8), pages 1-1, April.
  • Handle: RePEc:gam:jsusta:v:12:y:2020:i:8:p:3451-:d:349412
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    References listed on IDEAS

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    More about this item

    Keywords

    investment decision-making; uncertainty; inter-temporal decision-making; real options; laboratory experiment;

    JEL classification:

    • Q - Agricultural and Natural Resource Economics; Environmental and Ecological Economics
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • Q2 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation
    • Q3 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth
    • O13 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Agriculture; Natural Resources; Environment; Other Primary Products

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