This study applies insights from behavioral decision theory to explain how managers value call and put options. Behavioral decision theory points to important deviations from the assumptions of normative option pricing models in finance. We used a questionnaire to collect option pricing data to test our behavioral hypotheses. The evidence indicates specific biases affecting subjective valuations of options: (1) buyers and sellers price options below their expected values; (2) buyers' prices are consistently below sellers' prices; (3) irrelevant outcomes decrease option values; (4) discount rates vary with the option time horizon; and (5) changes in option values do not fully reflect increases in exercise prices. We discuss the implications of these findings for the management of real options and suggest directions for developing descriptive real option theory. Copyright © 2003 John Wiley & Sons, Ltd.