Inertia in disinvestment decisions: experimental evidence

Abstract

In this paper we analyse the timing of disinvestment decisions by applying a real options approach to explain the experimentally observed disinvestment behaviour of agricultural entrepreneurs. Within this framework the tendency to postpone exit and termination choices can be rationalised. The validity of the real options theory is assessed by means of economic experiments. Our results show that real options models can predict actual disinvestment decisions better than traditional investment theory. Nevertheless, the reluctance to disinvest observed in the experiments was even more pronounced than that predicted by the theory. This finding suggests that non-monetary aspects such as emotions, attachment to farming and different facets of psychological inertia should be incorporated into disinvestment models. , Oxford University Press.