Real Option Exercise Decisions in Information Technology Investments: a Comment
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Real Option Exercise Decisions in Information Technology Investments: a Comment Josef Schosser1 Received: 29 February 2020 / Accepted: 29 September 2020 / © Springer Nature Switzerland AG 2020
Abstract The paper comments on Khan et al. (J Assoc Inf Syst 18(5):372–402, 2017), who study real option exercise decisions in the context of a single IT project and in a portfolio setting, respectively. The issues identified concern the concept of (economic) rationality and the treatment of project interdependencies. The explanations provided may prove useful in other contexts. Keywords Real options · Rationality · Investment decisions
1 Introduction Khan et al. [1] study real option exercise decisions in the context of a single IT project and in a portfolio setting, respectively. In particular, they “investigate the vulnerability of real option exercise decisions to decision biases” (p. 373). The authors provide a valuable service in bringing to the attention of the Information Systems (IS) community a few of the problems associated with IT investment decisions. However, I think some of the points raised by Khan et al. [1] are open to discussion. In detail, I question the classification of “rational” and “biased” decisions and the treatment of resource interdependencies. The facts required to clarify the problems referred to are distributed throughout a large number of publications from different streams of literature. Therefore, a mere reference to individual sources, such as textbooks on the valuation of real options [2, 3] or comprehensive articles, is not possible. The communication at hand collects and integrates the relevant arguments. It pays particular attention to the relationship between market-based and preference-based valuation and the distinction between linear and nonlinear dependencies. Against this background, suggestions for further research are derived. The explanations may be of use to the entire field of Operations Research. Josef Schosser
[email protected] 1
University of Passau, 94030 Passau, Germany
27
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SN Operations Research Forum
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2 Problems My first objection concerns the classification of “rational” and “biased” decisions. Khan et al. [1, p. 374] use the following classification: “We use the term ‘managerial bias’ or ‘bias’ to describe any deviation from the decision that a rational economic agent would make in a similar situation. Given that real options theory and its application in IS uses a risk-neutral framework for valuing options ( . . . ), we consider a rational economic agent as a risk-neutral investor. Hence, a rational economic agent would exercise real options optimally, and bias would result in a suboptimal exercise decision.” However, in option pricing theory “risk-neutral valuation” is to be understood in a different way. This is briefly outlined below. In general, the value of risky cash flows depends on the consumption possibilities associated with them (taking into account potential interactions with exogenous and market-determined incom
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