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S. Rötzer:
"Now or never - End-game effects in R&D project investment";
Talk: 29th Workshop of the Austrian Working Group on Banking and Finance, Wirtschaftsuniversität Wien (invited); 2014-11-21 - 2014-11-22.

This paper investigates the valuation of an option to invest in a project of uncertain cost on a finite time horizon. The common body of knowledge attributes a positive value to flexibility and the possibility to postpone an investment in order to wait for the arrival of new information. From this point of view an investor will assume that as time passes and the R&D projects deadline 1 approaches the value of the option to invest in the project will gradually vanish. Hence it appears logical that the willingness to invest in a project declines as time is running out. In my work I show that under
certain conditions the opposite is the case i.e. as the deadline for completion approaches, investors increase their willingness to invest in the progress of the R&D project as a last effort to claim the reward and avoid failure. What appears as non-rational behavior of
an investor who seeks to avoid sunk costs, is actually a fully rational investment strategy.

Real options, Research and development, Dynamic programming, Uncertainty

http://publik.tuwien.ac.at/files/PubDat_232474.pdf