Real Options in Agile Software Development: Handling the Paradox of Flexibility and Behavioural Stickiness in Project Valuation


Agile software development (ASD) increases project flexibility. While the induced real option values (ROVs) are widely discussed in IS literature and used for project management decisions in practice, behavioural deformations as discussed in naturalistic decision making (NDM) theory such as overopti- mism or an escalation of commitment might mislead project management e.g. to abandon unsuccessful projects later than rationally appropriate. In this case, behavioural shortcomings dealing with imper- fect, noisy information about the project evoke an overvaluation of the supposed project flexibility and should be anticipated in project decisions by adjusting ROVs. However, while behavioural finance gains much momentum, there is no correspondence to that in IS research. Therefore, this paper aims to close this gap: It provides following design science research (1) basic concepts of NDM that should be in- cluded in IT project valuation, (2) a base for modelling behaviourally induced consequences for project investment valuation and management decisions in a multi-period setting, (3) for illustration a simula- tion study with a sequence of abandonment options in ASD and (4) recommendations for project man- agement how to integrate behavioural deformations in real life decisions. It therefore contributes to descriptive and prescriptive decision and project management theory as well.

ECIS 2018 Conference Proceedings