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Contribution Details

Type Conference or Workshop Paper
Scope Discipline-based scholarship
Published in Proceedings Yes
Title An experimental study on real option strategies
Organization Unit
  • Mei Wang
  • Abraham Bernstein
  • Marc Chesney
Presentation Type paper
Item Subtype Original Work
Refereed Yes
Status Published in final form
  • English
Page Range 1 - 36
Event Title 37th Annual Meeting of the European Finance Association
Event Type conference
Event Location Frankfurt am Main, Germany
Event Start Date January 1 - 2010
Event End Date January 1 - 2010
Abstract Text We conduct a laboratory experiment to study whether people intuitively use real-option strategies in a dynamic investment setting. The participants were asked to play as an oil manager and make production 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 incorporating the true underlying process into their decisions, and improved their decisions during the later stage.
Other Identification Number 1427; merlin-id:103
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