Time (in)consistency and real options: Much ado about nothing?

• We analyze the impact of quasi-hyperbolic discounting.
• Financial instruments can provide for the irrelevance of pure time preferences.
• If not, earlier exercise presupposes quite specific parameter conditions.

If decision makers have exclusive rights to particular investment projects, they frequently have the opportunity to delay these investments. This paper analyzes the effect of quasi-hyperbolic discounting, i.e. time-inconsistent preferences on the exercise timing of such options to defer an investment. It complements earlier work on this issue covering risk aversion and capital market interaction. The results are as follows: In a number of cases, the capital market environment provides for the irrelevance of quasi-hyperbolic discounting. Besides this, a different behavior of time-inconsistent and time-consistent decision makers occurs only for quite specific parameter conditions. In light of experimental evidence for time-inconsistent behavior, this provokes the following question: Is time-inconsistent behavior really driven by quasi-hyperbolic discounting, but rather by more fundamental irrationality (like a disregard of fairly ubiquitous market opportunities)?