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• W183857051 abstract "Escalation of commitment is a behavioural bias that occurs when a project manager continues a failingcourse of actions, while it is better to abandon the involved project. In such a case a manager whoalready invested a lot of effort and resources in a project, may not be able to resist the temptation tocontinue with their project, and may not understand the logic of sunk costs.This study investigated whether the use of the real option analysis as a capital budgeting analysiscould mitigate this escalation of commitment, in comparison with the use of the traditional net presentvalue method.An experiment was constructed for 64 university students with a finance background. The treatmentgroup was told to use the real option valuation as capital budgeting analysis, while the control groupwas told to use the traditional net present value method. Both groups were challenged with the samecase. The case was presented as an investment game in which the participants could earn an certainamount of money, depending on their performance. The case simulated an investment opportunitywith two sequential time stages. The cash flows and the likelihood of success and failure were givenand it was mentioned that the assets could be sold at any moment for a certain percentage of theirvalue (implied option to abandon).In the first stage the participants had to decide whether to accept the project or not. If invested, theyhad to decide whether to continue or not in the second stage. In this second stage they were challengedwith two different scenarios, both a bad and a good case scenario. The provided numbers in the badcase should evidently lead them to abandon of the project. Nevertheless, when one would continue inthis bad case scenario, escalation of commitment is present.Significant evidence was obtained indicating that students using the net present value method weremore prone to escalation of commitment than students using real option analysis. Hence, imbeddingreal options in a project valuation affects the behaviour of managers, reducing their tendency toescalate their commitment to a failing project.Furthermore, the occurrence of this escalation seemed to be significantly positively related with thedegree of loss aversion of the participants. People with a high loss aversion might find it hard to acceptlosses when abandoning the project, and rather continue the failing project in order to avoid thethreatening losses. Moreover, results did not indicate whether the mitigating effect of the real optionvaluation differs between men and women." @default.
• W183857051 created "2016-06-24" @default.
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• W183857051 date "2013-10-07" @default.
• W183857051 modified "2023-09-27" @default.
• W183857051 title "Real Options and bias of commitment escalation" @default.
• W183857051 hasPublicationYear "2013" @default.
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