Laboratory Evidence on How Managers Intuitively Value Real Growth Options

We asked 82 experienced managers to value, in effect, a set of real options, by taking decisions on invented case studies. The classic Black Scholes model should set an upper bound for rational valuations of these options (since it assumes a risk neutral discount rate, which may be optimistic). The managers valued their options erratically, and generally optimistically, though their responses to changes in moneyness, volatility and maturity tended to be in the ‘correct’ directions. Oil industry managers over-valued least, relative to Black-Scholes, and Brewery managers most. Questionnaires explored managers' perceptions of the real option parameters encountered in their workplaces.