Examining Real Options Exercise Decisions in Information Technology Investments

: Researchers have advocated real options thinking (ROT) for evaluating and managing risky IT investments to account for managerial decision flexibility. Effective ROT is a three-step process that requires managers to recognize, value, and exercise options embedded in IT projects. Prior research has illustrated the existence of managerial bias in the recognizing and valuing real options. However, little research has examined real options exercise decisions. Hence, we use prospect theory to examine whether IT managers demonstrate systematic biases while exercising real options in IT projects and portfolios. We also study whether one can control or mitigate such biases. We found evidence of biased (suboptimal) real option exercise decisions in IT projects and in IT portfolios. However, we found differences in biased decision making between a single project and a portfolio scenario. We also found that project scale and real option type influenced vulnerability of a project to biased decision making. In addition, simplifying the presentation of the net effects of real options exercise decisions can help reduce bias, especially for large project portfolios. We discuss the implications of these results on theory and practice. on the real options than the planned path component of project value in long-term projects. The extent to which supervising managers rely on the real options component of value in their funding decisions can be influenced by aggregating or disaggregating the components of project value in a financial summary of subordinates’ long-term investment proposals because the report format influences perceptions of the relative accuracy of the planned path and real options components of project value.