Managerial perspectives on risk and risk taking
Management Science
Capital budgeting in information systems development
Information and Management
Timid choices and bold forecasts: a cognitive perspective on risk taking
Management Science
Multivariate data analysis (4th ed.): with readings
Multivariate data analysis (4th ed.): with readings
A Case for Using Real Options Pricing Analysis to Evaluate Information Technology Project Investment
Information Systems Research
The application of real options to the information technology valuation process: a benchmark study
The application of real options to the information technology valuation process: a benchmark study
Journal of Management Information Systems
A Framework for Assessing the Business Value of Information Technology Infrastructures
Journal of Management Information Systems
Prioritizing a Portfolio of Information Technology Investment Projects
Journal of Management Information Systems
On the Valuation of Multistage Information Technology Investments Embedding Nested Real Options
Journal of Management Information Systems
Managing Information Technology Investment Risk: A Real Options Perspective
Journal of Management Information Systems
Journal of Management Information Systems
What Competition? Myopic Self-Focus in Market-Entry Decisions
Organization Science
Should We Go Our Own Way? Backsourcing Flexibility in IT Services Contracts
Journal of Management Information Systems
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Real options analysis is an important but costly tool for valuing many information technology (IT) investments. As a low-cost substitute for real options-based methods, firms often depend on managerial intuition, which sometimes approximates real options-based valuations and sometimes does not. Making good choices about how to value IT investments requires an understanding of why, and therefore when, intuitive judgment is more or less likely to be consistent with real options-based valuations. Field and survey studies have provided ex post observations of systematic variations in consistency by option type, but ex ante hypotheses explaining this variation have been rare. This study uses two behavioral economic theories to predict option-type-specific differences between intuitive judgments and real options prescriptions. Regret theory posits that individuals will value decision outcomes based on both the expected utility of payoffs and on anticipated regret for not having made an alternative decision. As a consequence, intuitive IT investment decisions are less aggressive as uncertainty increases (higher valuation of deferral options, lower valuation of growth options), in contrast to higher normative values for both real option types with higher uncertainty. Consistent with competitive behavior theories that predict overaggressive behavior to contest market behavior, intuitive IT investment decisions are more aggressive in the presence of a potential competitor (lower valuation of deferral and higher valuation of growth options), holding constant the normative value of the options. We present experimental evidence consistent with these predictions. An important implication of our results is that future research should not test for general consistency between intuitive judgment and real options theory, but should identify and explain systematic variation in consistency across option types and settings. Such variation is important in practice because it determines when intuitive judgment is and is not likely to be an adequate substitute for costly formal real options valuation. It also determines when training in real options concepts needs to be more intensive to overcome inconsistency with intuitive judgment, and when the outputs of formal real options valuation are likely to be unintuitive and thus not readily acceptable to managers with limited option theory training.