Group-Managed Real Options

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• Lorenzo Garlappi (Sauder)
• Thursday 03 June 2021, 13:00-14:00
• Online.

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We study a standard real-option problem where sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative ``median’’ member. As a result, members’ disagreement generates inertia—-the group delays investment relative to a single-agent case—-and underinvestment—-the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.

This talk is part of the Cambridge Finance Workshop Series series.

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