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An Experimental Study On Real Option Strategies

Author

Listed:
  • Mei WANG

    (University of Zurich and Swiss Finance Institute)

  • Abraham BERNSTEIN

    (University of Zurich)

  • Marc CHESNEY

    (University of Zurich and Swiss Finance Institute)

Abstract

We conduct a laboratory experiment to study whether people in- tuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make pro- duction decisions in response to a simulated mean-reverting oil price. Using cluster analysis, participants can be classified into four groups, which we label as "mean-reverting,"Brownian motion real-option," "Brownian motion myopic real-option," and "ambiguous." We find two behavioral biases in the strategies by our participants: ignoring the mean-reverting process, and myopic behavior. Both lead to too frequent switches when compared with the theoretical benchmark. We also find that the last group behaves as if they have learned to incorpo- rating the true underlying process into their decisions, and improved their decisions during the later stage.

Suggested Citation

  • Mei WANG & Abraham BERNSTEIN & Marc CHESNEY, 2009. "An Experimental Study On Real Option Strategies," Swiss Finance Institute Research Paper Series 09-48, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp0948
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    More about this item

    Keywords

    Real Option; Experimental Economics; Heterogeneity.;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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