Behavioral Option Theory: Foundations and Evidence.

Valuing real options is not an easy task. Their idiosyncratic nature eliminates the market discipline underlying financial option pricing formulas and allows individual risk preferences and biases to enter into option pricing. This study applies behavioral decision theory to option pricing. The resulting hypotheses were tested using option pricing questionnaire data from graduate business students. The evidence indicates risk aversion, discount rates that vary with the option time horizon, and attention to irrelevant outcomes affect subjective option valuations.