Premium
The Bounded Rationality Bias in Managerial Valuation of Real Options: Theory and Evidence from IT Projects *
Author(s) -
Tiwana Amrit,
Wang Jijie,
Keil Mark,
Ahluwalia Punit
Publication year - 2007
Publication title -
decision sciences
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.238
H-Index - 108
eISSN - 1540-5915
pISSN - 0011-7315
DOI - 10.1111/j.1540-5915.2007.00152.x
Subject(s) - bounded rationality , valuation (finance) , rationality , phenomenon , bounded function , value (mathematics) , field (mathematics) , economics , empirical research , actuarial science , computer science , microeconomics , management science , accounting , epistemology , mathematics , mathematical analysis , philosophy , machine learning , pure mathematics
Although real options theory normatively suggests that managers should associate real options with project value, little field research has been conducted to test whether they suffer from systematic biases in doing so. We draw on the notion of bounded rationality in managerial decision making to explore this understudied phenomenon. Using data collected from managers in 88 firms, we show that managers exhibit what we label the bounded rationality bias in their assessments: They associate real options with value only when a project's easily quantifiable benefits are low, but fail to do so when they are high. The study also contributes the first set of empirical measures for all six types of real options. The study contributes to managerial practice by identifying the conditions under which managers must be vigilant about inadvertently neglecting real options and by providing a simple approach for assessing real options in technology development projects.