Real Options: Experimental Evidence

Posted: 29 Dec 2004

See all articles by C. F. Sirmans

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law

Abdullah Yavas

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics

Multiple version iconThere are 2 versions of this paper

Abstract

Empirical testing of the real options theory has been very limited. This is primarily due to various inherent problems with obtaining field data for many components of real options theory. This paper utilizes experimental methodology to generate the data. The advantage of the experimental approach is that it enables the investigator to generate reliable and replicable data in a controlled environment. The results of the experiment indicate that fundamental insights of real options theory are not evident to individual investors. The majority invested too early and thus failed to recognize the benefit of the option to wait. However, when the investors had to compete with others for the right to invest, their bids generally reflected the value of the embedded option. Furthermore, as predicted by the theory, their bids increased with greater uncertainty about future cash flows from the investment.

Keywords: Real options, experimental modeling, real estate investment, investment timing

Suggested Citation

Sirmans, C. F. and Yavas, Abdullah, Real Options: Experimental Evidence. Journal of Real Estate Finance & Economics, Vol. 31, No. 1, pp. 27-52, August 2005. Available at SSRN: https://ssrn.com/abstract=634123

C. F. Sirmans

Florida State University - Department of Risk Management, Insurance, Real Estate & Business Law ( email )

Tallahasse, FL 32306
United States
850 644-4076 (Phone)

HOME PAGE: http://www.cob.fsu.edu/rmi

Abdullah Yavas (Contact Author)

University of Wisconsin - School of Business - Department of Real Estate and Urban Land Economics ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States

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