One of the pitfalls of real options analysis is that managers may have an incentive and know-how to game the system and back-solve a formula to get a proposal approved.This can give rise to
A) managerial conceit.
B) the illusion of control.
C) escalation of commitment.
D) agency problems.

Question

Quizplus · Accepted Answer

Managers may have an incentive and the know-how to game the system. If managers know that a certain option value must be met in order for the proposal to get approved, they can back-solve the model to find a variance estimate needed to arrive at the answer that upper management desires. This is an example of an agency problem that is typically inherent in investment decisions. A manager may have something to gain by not acting in owner best interests, or the interests of managers and owners are not co-aligned.

One of the Pitfalls of Real Options Analysis Is That