[Back]

S. Rötzer:
"Now or Never -- End-Game Effects in Time Limited Real R&D Option Investment";
Talk: Annual International Conference of the Real Options Group, Griechenland, Athen und Monemvasia (invited); 2015-06-17 - 2015-06-20.

This paper investigates the valuation of an option to invest in an R&D 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 a decision maker will assume that as time passes and the R&D projects terminal date 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, decision makers 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 individual who seeks to avoid sunk costs, is actually a fully rational investment strategy.

Research and development, R&D, real options, time limit, finite-lived

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2555567