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Past information systems research on real options has focused mainly on evaluating information technology (IT)investments that embed a single, a priori known option (such as, deferral option, prototype option). In other words, only once a specific isolated option is identified as being embedded in a target IT investment, does this research call upon using real options analysis to evaluate the option. In effect, however, because real options are not inherent in any IT investment, they usually must be planned and intentionally embedded in a target IT investment in order to control various investment-specific risks, just like financial risk management uses carefully chosen options to actively manage investment risks. Moreover, when an IT investment involves multiple risks, there could be numerous ways to reconfigure the investment using different series of cascading (compound) options. In this light, we present an approach for managing IT investment risk that helps to rationally choose which options to deliberately embed in an investment so as to optimally control the balance between risk and reward. We also illustrate how the approach is applied to an IT investment entailing the establishment of an Internet sales channel.

Since the implementation of the Belt and Road Initiative (BRI) in 2013, Chinese enterprises have expanded port and industrial investments along the Maritime Silk Road (MSR), forming a mutually reinforcing coupled system. Port investments reduce transportation costs and promote the relocation of industries to host countries. In turn, industrial agglomeration further promotes port investment. However, risks arising from political and economic uncertainties in host countries, as well as fluctuations in international relations, have become increasingly prominent. Due to the differences in the types and levels of risks faced by port and industrial investments, port investment decisions have become more complex and uncertain. To address this issue, this study constructs a bi-level optimization model. The upper model (UM) aims to maximize the total investment profit by optimizing the scale of multiple port investments. The lower model (LM) employs a User Equilibrium (UE) framework to determine the spatial distribution of industries under equilibrium conditions. Using 14 countries along the MSR as a case study, this paper estimates the number of newly constructed berths in each country and the corresponding investment returns. It also finds that local wages and land prices tend to rise after investment. The findings provide valuable references for Chinese enterprises in making overseas investment decisions.

High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that, when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if institutional investors form a large part of the shareholder base.

Countercyclical Risk Aversion Can Explain Major Puzzles Such as the High Volatility of Asset Prices. Evidence for its Existence is However, Scarce Because of the Host of Factors that Simultaneously Change During Financial Cycles. We Circumvent these Problems by Priming Financial Professionals with Either a Boom or a Bust Scenario. Subjects Primed with a Financial Bust were Substantially More Fearful and Risk Averse than those Primed with a Boom, Suggesting that fear may play an Important Role in Countercyclical Risk Aversion. The Mechanism Described here is Relevant for Theory and may Explain Self-reinforcing Processes That Amplify Market Dynamics.

We investigate whether individual experiences of macroeconomic shocks affect financial risk taking, as often suggested for the generation that experienced the Great Depression. Using data from the Survey of Consumer Finances from 1960 to 2007, we find that individuals who have experienced low stock market returns throughout their lives so far report lower willingness to take financial risk, are less likely to participate in the stock market, invest a lower fraction of their liquid assets in stocks if they participate, and are more pessimistic about future stock returns. Those who have experienced low bond returns are less likely to own bonds. Results are estimated controlling for age, year effects, and household characteristics. More recent return experiences have stronger effects, particularly on younger people.

Whereas conventional wisdom holds that multinational enterprises (MNEs) invest less in host countries that pose greater policy risk—the risk that a government will opportunistically alter policies to expropriate an investing firm's profits or assets—we argue that MNEs vary in their response to host-country policy risk as a result of differences in organizational capabilities for assessing such risk and managing the policy-making process. We hypothesize that firms from home countries characterized by weaker institutional constraints on policy makers or greater redistributive pressures associated with political rent seeking will be less sensitive to host-country policy risk in their international expansion strategies. Moreover, firms from home countries characterized by sufficiently weak institutional constraints or sufficiently strong redistributive pressures will seek out riskier host countries for their international investments to leverage their political capabilities, which permit them to attain and defend attractive positions or industry structures. We find support for our hypotheses in a statistical analysis of the foreign direct investment location choices of MNEs in the electric power generation industry during the period 1990-1999, the industry's first decade of internationalization.

It is ultimately an empirical question whether risk preferences are stable over time. The evidence comes from diverse strands of literature, covering the stability of risk preferences in panel data over shorter periods of time, life-cycle dynamics in risk preferences, the possibly long-lasting effects of exogenous shocks on risk preferences as well as temporary variations in risk preferences. Individual risk preferences appear to be persistent and moderately stable over time, but their degree of stability is too low to be reconciled with the assumption of perfect stability in neoclassical economic theory. We offer an alternative conceptual framework for preference stability that builds on research regarding the stability of personality traits in psychology. The definition of stability used in psychology implies high levels of rank-order stability across individuals and not that the individual will maintain the same level of a trait over time. Preference parameters are considered as distributions with a mean that is significantly but less than perfectly stable, plus some systematic variance. This framework accommodates evidence on systematic changes in risk preferences over the life cycle, due to exogenous shocks such as economic crises or natural catastrophes, and due to temporary changes in self-control resources, emotions, or stress. We note that research on the stability of (risk) preferences is conceptually at the heart of microeconomics and systematic changes in risk preferences have vital real-world consequences.

The behavioral agency model suggests family firms invest less in R&D than nonfamily firms to protect their socioemotional wealth. Studies support this contention but do not explain how family firms make R&D investments. We hypothesize that when performance exceeds aspirations, family firms manage socioemotional and economic objectives by making exploitative R&D investments that lead to more reliable and less risky sales levels. However, performance below aspirations leads to exploratory R&D investments that result in potentially higher but less reliable sales levels. Using a risk abatement model, our analyses of 847 firms over 10years supports our hypotheses.

Using new data for the universe of firms covered in Amadeus, we reconstruct the portfolios of shareholders who hold equity stakes in private- and publicly traded European firms. We find great heterogeneity in the degree of portfolio diversification across large shareholders. Exploiting this heterogeneity, we document that firms controlled by diversified large shareholders undertake riskier investments than firms controlled by nondiversified large shareholders. The impact of large shareholder diversification on corporate risk-taking is both economically and statistically significant. Our results have important implications at the policy level because they identify one channel through which policy changes can improve economic welfare.

Motivated by the evidence that risk premia are large and countercyclical, this paper studies a tractable real business cycle model with a small risk of economic disaster, such as the Great Depression, An increase in disaster risk leads to a decline of employment, output, investment, stock prices, and interest rates, and an increase in the expected return on risky assets. The model matches well data on quantities, asset prices, and particularly the relations between quantities and prices, suggesting that variation in aggregate risk plays a significant role in some business cycles.