Anne M. Farrell

Managers’ Incorporation of the Value of Real Options into Their Long-Term Investment Decisions: An Experimental Investigation

While academic and practitioner literature has advocated the use of real options in firms’ longterm investment appraisal processes, few studies have examined the extent to which real options are incorporated into decisions when they are available for decision-making. Using two experiments, we examine supervising managers’ reliance on real options values in their decisions about funding for subordinates’ long-term investment project proposals. We predict and find with Experiment 1 that when making funding decisions, supervising managers rely less on the value of real options than on the value of a project’s planned implementation path. We predict and find with Experiment 2 that, holding information constant, a simple accounting change influences supervisors’ reliance on real options values in their funding decisions: they rely more on the real options components of project value when the amount is aggregated with (rather than displayed separately from) the value of the projects’ planned implementation paths in a financial summary of subordinates’ proposals. We provide evidence of the process underlying how the financial summary affects funding decisions – specifically, it does so by influencing perceptions of the relative accuracy of the planned path and real options components of value. Results for both experiments hold after controlling for participants’ knowledge of discounted cash flow and real options valuation and perceptions of risk in subordinates’ projects.

Financial Incentives Differentially Regulate Neural Processing of Positive and Negative Emotions during Value-Based Decision-Making

Emotional and economic incentives often conflict in decision environments. To make economically desirable decisions then, deliberative neural processes must be engaged to regulate automatic emotional reactions. In this functional magnetic resonance imaging (fMRI) study, we evaluated how fixed wage (FW) incentives and performance-based (PB) financial incentives, in which pay is proportional to outcome, differentially regulate positive and negative emotional reactions to hypothetical colleagues that conflicted with the economics of available alternatives. Neural activity from FW to PB incentive contexts decreased for positive emotional stimuli but increased for negative stimuli in middle temporal, insula, and medial prefrontal regions. In addition, PB incentives further induced greater responses to negative than positive emotional decisions in the frontal and anterior cingulate regions involved in emotion regulation. Greater response to positive than negative emotional features in these regions also correlated with lower frequencies of economically desirable choices. Our findings suggest that whereas positive emotion regulation involves a reduction of responses in valence representation regions, negative emotion regulation additionally engages brain regions for deliberative processing and signaling of incongruous events.