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Holding on for too long? An experimental study on inertia in entrepreneurs’ and non-entrepreneurs’ disinvestment choices

Listed author(s):
  • Sandri, Serena
  • Schade, Christian
  • Musshoff, Oliver
  • Odening, Martin

Disinvestment, in the sense of project termination and liquidation of assets including the cession of a venture, is an important realm of entrepreneurial decision-making. This study presents the results of an experimental investigation modeling the choice to disinvest as a dynamic problem of optimal stopping in which the patterns of decisions are analyzed with entrepreneurs and non-entrepreneurs. Our experimental results reject the standard net present value approach as an account of observed behavior. Instead, most individuals seem to understand the value of waiting. Their choices are weakly related to the disinvestment triggers derived from a formal optimal stopping benchmark consistent with real options reasoning. We also observe a pronounced ‘psychological inertia’, i.e., most individuals hold on to a losing project for even longer than real options reasoning would predict. The study provides evidence for entrepreneurs and non-entrepreneurs being quite similar in their behavior.

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File URL: http://purl.umn.edu/59518
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Paper provided by Humboldt University Berlin, Department of Agricultural Economics in its series Structural Change in Agriculture/Strukturwandel im Agrarsektor (SiAg) Working Papers with number 59518.

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Date of creation: Jan 2010
Handle: RePEc:ags:huscpw:59518
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