Question

Which of the following are potential pitfalls of real options analysis? (check all that apply.)

O irrational escalation of commitment
O back-solver dilemma
O entrepreneurial orientation
O overconfidence and the illusion of control

Answer 1

Potential pitfalls of real options analysis include irrational escalation of commitment, overconfidence, and the back-solver dilemma. These reflect cognitive biases and can affect the accuracy of analysis. Entrepreneurial orientation is not a pitfall of real options analysis.

Step-by-step explanation:

The question addresses the potential pitfalls of real options analysis, a technique used in business to assess investment opportunities. The pitfalls that apply are: irrational escalation of commitment, where decision-makers continue to invest in a project despite evidence suggesting it is no longer viable; overconfidence and the illusion of control, where managers may overestimate their ability to influence outcomes leading to optimistic forecasts; and the back-solver dilemma, which is a bias that occurs when the inputs of a model are manipulated to produce a desired outcome.

These pitfalls reflect cognitive biases and decision-making flaws that can affect the accuracy and reliability of a real options analysis. Entrepreneurial orientation is not typically considered a pitfall in this context as it pertains to an organization's strategic posture and is not directly related to the analytical process.