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Contribution Details

Type Journal Article
Scope Discipline-based scholarship
Title An experimental study on real options strategies
Organization Unit
  • Mei Wang
  • Abraham Bernstein
  • Marc Chesney
Item Subtype Original Work
Refereed Yes
Status Published in final form
  • English
Journal Title Quantitative Finance
Publisher Taylor & Francis
Geographical Reach international
ISSN 1469-7688
Volume 12
Number 11
Page Range 1753 - 1772
Date 2012
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 behaved as if they have learned to incorporate the true underlying process into their decisions, and improved their decisions during the later stage.
Official URL
Digital Object Identifier 10.1080/14697688.2012.691984
Other Identification Number merlin-id:6938
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