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Real Options: Experimental Evidence

  • Abdullah Yavas

    ()

  • C. Sirmans

    ()

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

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File URL: http://hdl.handle.net/10.1007/s11146-005-0992-6
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Article provided by Springer in its journal The Journal of Real Estate Finance and Economics.

Volume (Year): 31 (2005)
Issue (Month): 1 (August)
Pages: 27-52

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Handle: RePEc:kap:jrefec:v:31:y:2005:i:1:p:27-52
Contact details of provider: Web page: http://www.springerlink.com/link.asp?id=102945

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  10. 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 209-23, June.
  11. 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.
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