A Micro-Foundational Model of Real Options Reasoning: The Roles of Individual Search Propensity and Perceived Uncertainty

Abstract

To explain heterogeneity in real options reasoning (ROR) across entrepreneurial ventures, we propose a microfoundational model to explore the relationships between a firm leader’s search propensity, perceived uncertainty and the firm?level ROR?based behaviors. Using a panel survey of 134 founder?CEOs of new ventures, we find that founder?CEOs’ search propensity is positively related to ROR?based behaviors in their ventures. Moreover, we find that founder?CEOs’ perceived effect uncertainty is positively related to the ROR?based behaviors, but perceived response uncertainty is negatively related to the ROR?based behaviors, revealing the importance of considering distinct types of uncertainty in entrepreneurs’ ROR. Our microfoundational model advances the ROR literature by delineating how individual?level factors may drive ROR in firms that face uncertainty.