The main objective of this chapter is for students to demonstrate that they can identify the manner in which psychological phenomena affect managers’ use of real-option techniques.

After completing this chapter students will be able to:

1. Explain why opaque framing causes managers to refrain from using real-option techniques.
2. Explain how excessive optimism affects the investment policies of managers who use real-option techniques.
3. Explain how overconfidence affects the investment policies of managers who use real-option techniques.
4. Explain why excessive optimism and overconfidence mitigate the impact of agency conflicts associated with debt overhang and asset substitution.
5. Describe how real-option techniques can mitigate managers’ tendencies to throw good money after bad.

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