Session 251

Risk and Behavior: Preferences, Strategies, and Choices

Track D

Date: Tuesday, October 13, 2009


Time: 11:30 – 12:45


Room: Meeting Room5

Session Chair:
Catherine Maritan, Syracuse University

Title: Do Managers Value Strategic Investments in Line with Real Options Theory?


  • Michael Collins, Deloitte Consulting AG
  • Timothy Devinney, University of Leeds

Abstract: Real options theory is a normative framework that has been applied to understanding and improving strategic decision-making. Yet, despite its conceptual appeal, it is not clear whether managers can or do make decisions that agree with its predictions/prescriptions. Using experimentally derived managerial preferences the impact of the different investment parameters on investment choice was obtained. We show that managers viewed the increased uncertainty and longer times to expiry of option investments as reducing value, a fact conforming to traditional DCF rules but in opposition to real options theory. The implications are that, although real options theory implies that it is better for managers to consider the positive aspects of the “option” parameters, the reality is that managers cognitively react negatively to them.

Title: Reference Dependence in Strategic Risk Preferences May Facilitate Market Coordination


  • Daniel Malter, Harvard Business School

Abstract: Reference dependent risk preferences by individuals and organizations are typically deemed a behavioral bias due to bounded rationality. However, little is known about the benefits this behavior may have. This paper argues that reference dependent risk preferences can facilitate the coordination of competitors. Evidence is presented using data from experimental market entry games. Markets coordinate remarkably well when competitors differ in their prior outcomes and know the outcomes of their competitors. Thus, a “bias” of reference dependence in strategic risk preferences may have unforeseen positive consequences on aggregate outcomes. They may promote the coordination of competitive markets toward efficiency.

Title: Uncertainty and Managerial Risk Preference: Who Wins and Who Loses with Real Options?


  • Richard Reed, Cleveland State University
  • Susan Storrud-Barnes, Cleveland State University

Abstract: Real-options theory has remained true to its financial-options-pricing heritage, including use of the assumption of risk neutrality, but research has shown that managers can be risk seeking or risk averse. Further, their preference on risk and consequent behavior is a function of their position as agents acting on behalf of principals, and thus they are driven by their desire to protect their own interests. Therefore, the question that this work asks is: what happens to prescriptions on real-option investments (wait, compound, strike) when the assumption of risk neutrality is relaxed, and how does it affect stockholders, bondholders, and managers?

All Sessions in Track D...

Tue: 11:30 – 12:45
Session 251: Risk and Behavior: Preferences, Strategies, and Choices

Strategic Management Society

Washington DC