Risky choices in strategic environments: An experimental investigation of a real options game

• Published in: European journal of operational research Vol. 279; no. 1; pp. 143 - 158
• Main Authors: Morreale, Azzurra, Mittone, Luigi, Lo Nigro, Giovanna
• Format: Journal Article
• Language: English
• Published: Elsevier B.V 16.11.2019
• Subjects: Behavioural OR; Continuous distribution; Continuous distributions; Decision making; Laboratory experiments; Real Options; Real options games; Stochastic systems; Uncertainty; Behavioural OR; Continuous distributions; Real options games; Uncertainty; Laboratory experiments
• ISSN: 0377-2217; 1872-6860; 1872-6860
• DOI: 10.1016/j.ejor.2019.05.013

•A real options game under uncertainty and rivalry is experimentally tested.•A sequential interaction game is designed with and without strategic uncertainty.•The model's predictions are falsified when strategic uncertainty is added.•The theoretical predictions’ failure is due to disutility from loss of control.•The paper contributes to trust game literature introducing stochastic payoffs. Managers frequently make decisions under conditions of fundamental uncertainty due the stochastic nature of the outcomes and competitive rivalry. In this study, we experimentally test a theoretical model under fundamental uncertainty and competitive rivalry by designing a sequential interaction game between two players. The first mover can decide either to choose a sure outcome that assigns a risky outcome to the second mover or to pass the decision to the second mover. If the second player gets the chance to decide, she can choose between a sure outcome, conditioned by the assignment of a risky payoff to the first mover, or the sharing of the risky outcome with the first mover. We then introduce the following experimental treatments: (i) relegating second-mover participants to a purely passive role and substituting them with a random device (absence of strategic uncertainty – that is, when the source of uncertainty is a human subject); (ii) providing information about the behaviour of second-mover counterparts; and (iii) completely removing the second-mover participant. We find that decision makers are sensitive to the presence or absence of strategic uncertainty; indeed, in the presence of strategic uncertainty, first movers more often diverge from the behaviour predicted by the model. Given our experimental results, the theoretical model needs to be revisited. The standard model of monetary payoff-maximizing agents should be substituted by one of decision makers who maximize a utility function which includes the psychological cost induced by strategic uncertainty.