Real Options: Experimental Evidence
Empirical testing of the real options theory has been very limited. This is primarily due to various inherent problems with obtaining field data for many components of real options theory. This paper utilizes experimental methodology to generate the data. The advantage of the experimental approach is that it enables the investigator to generate reliable and replicable data in a controlled environment. The results of the experiment indicate that fundamental insights of real options theory are not evident to individual investors. The majority invested too early and thus failed to recognize the benefit of the option to wait. However, when the investors had to compete with others for the right to invest, their bids generally reflected the value of the embedded option. Furthermore, as predicted by the theory, their bids increased with greater uncertainty about future cash flows from the investment. Copyright Springer Science + Business Media, Inc. 2005
Volume (Year): 31 (2005)
Issue (Month): 1 (August)
|Contact details of provider:|| Web page: http://www.springer.com|
|Order Information:||Web: http://www.springer.com/economics/regional+science/journal/11146/PS2|
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.:
- Capozza, Dennis R. & Helsley, Robert W., 1990. "The stochastic city," Journal of Urban Economics, Elsevier, vol. 28(2), pages 187-203, September.
- William C. Wheaton, 1989. "On the use of the Financial Option Price Model to Value and Explain Vacant Urban Land," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 159-160.
- Williams, Joseph T, 1991. "Real Estate Development as an Option," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 191-208, June.
- Grenadier, Steven R, 1995. "The Persistence of Real Estate Cycles," The Journal of Real Estate Finance and Economics, Springer, vol. 10(2), pages 95-119, March.
- Brookshire, David S & Coursey, Don L & Schulze, William D, 1987. "The External Validity of Experimental Economics Techniques: Analysis of Demand Behavior," Economic Inquiry, Western Economic Association International, vol. 25(2), pages 239-250, April.
- McConnell, John J. & Schallheim, James S., 1983. "Valuation of asset leasing contracts," Journal of Financial Economics, Elsevier, vol. 12(2), pages 237-261, August.
- Leahy, John V & Whited, Toni M, 1996.
"The Effect of Uncertainty on Investment: Some Stylized Facts,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 28(1), pages 64-83, February.
- John V. Leahy & Toni M. Whited, 1995. "The Effect of Uncertainty on Investment: Some Stylized Facts," NBER Working Papers 4986, National Bureau of Economic Research, Inc.
- Riddiough, Timothy J., 1997. "The Economic Consequences of Regulatory Taking Risk on Land Value and Development Activity," Journal of Urban Economics, Elsevier, vol. 41(1), pages 56-77, January.
- Russell Cooper & Douglas V. DeJong & Robert Forsythe & Thomas W. Ross, 1989. "Communication in the Battle of the Sexes Game: Some Experimental Results," RAND Journal of Economics, The RAND Corporation, vol. 20(4), pages 568-587, Winter.
- Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
- David Geltner, 1989. "On the use of the Financial Option Price Model to Value and Explain Vacant Urban Land," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 17(2), pages 142-158.
- Capozza, Dennis R & Sick, Gordon A, 1991. "Valuing Long-Term Leases: The Option to Redevelop," The Journal of Real Estate Finance and Economics, Springer, vol. 4(2), pages 209-223, June.
- A. Steven Holland & Steven H. Ott & Timothy J. Riddiough, 2000. "The Role of Uncertainty in Investment: An Examination of Competing Investment Models Using Commercial Real Estate Data," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 28(1), pages 33-64. Full references (including those not matched with items on IDEAS)