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Do People Disinvest Optimally?

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  • John D Hey
  • Konstantina Mari

Abstract

The disinvestment decision is of importance in many contexts: if funds are tied up for too long in a poorly-performing project, then opportunities for re-investment may be missed. Optimal disinvestment theory is a component of real options theory, but is relatively ignored by experimentalists. Two recent papers conclude that decision-makers stay in projects longer than that prescribed by the optimal behaviour of a risk-neutral agent. This departure is explained through riskaversion, but without a formal hypothesis under test. We report here on an experiment which explains the behaviour of the subjects through an estimationof risk-aversion. We also explore an alternative hypothesis – that subjects are myopic. Our results show that few subjects appear to be risk-neutral, many seem to be risk-averse but few are myopic.

Suggested Citation

  • John D Hey & Konstantina Mari, 2015. "Do People Disinvest Optimally?," Discussion Papers 15/13, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:15/13
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    File URL: https://www.york.ac.uk/media/economics/documents/discussionpapers/2015/1513.pdf
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    References listed on IDEAS

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    1. Charles A. Holt & Susan K. Laury, 2002. "Risk Aversion and Incentive Effects," American Economic Review, American Economic Association, vol. 92(5), pages 1644-1655, December.
    2. Sandri, Serena & Schade, Christian & Mußhoff, Oliver & Odening, Martin, 2010. "Holding on for too long? An experimental study on inertia in entrepreneurs' and non-entrepreneurs' disinvestment choices," Journal of Economic Behavior & Organization, Elsevier, vol. 76(1), pages 30-44, October.
    3. Oliver Musshoff & Martin Odening & Christian Schade & Syster Christin Maart-Noelck & Serena Sandri, 2013. "Inertia in disinvestment decisions: experimental evidence," European Review of Agricultural Economics, Foundation for the European Review of Agricultural Economics, vol. 40(3), pages 463-485, July.
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    More about this item

    Keywords

    disinvestment; experiments; myopia; real options; risk-aversion; rolling horizon;

    JEL classification:

    • C9 - Mathematical and Quantitative Methods - - Design of Experiments
    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles

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