Real Options Analysis and Strategic Decision Making

Edward H. Bowman and Gary T. Moskowitz ()
Additional contact information
Edward H. Bowman: formerly at The Wharton School, University of Pennsylvania
Gary T. Moskowitz: Edwin L. Cox School of Business, Southern Methodist University, P.O. Box 750333, Dallas, Texas 75275-0333

Organization Science, 2001, vol. 12, issue 6, 772-777

Abstract: The real options approach is frequently advocated as an approach that offers a positive and radical reassessment of the value of risk and exploration. We examine a recent case where Merck used the real options approach to justify an investment in an R&D project. This case is used to highlight some of the problems associated with using real options. We note that the assumptions incorporated in most standard option valuation models can conflict with the conclusions reached by strategic analysis. As a result, users of real options models should understand the quantitative aspects of these models, and may often need to create a customized model for each situation. The difficulty of developing customized models may explain, in part, the limited use of the real options approach in strategic analysis.

Keywords: Real Options; Decision Making; Research and Development; Strategic Analysis (search for similar items in EconPapers)
Date: 2001
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Citations: View citations in EconPapers (53)

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Persistent link: https://EconPapers.repec.org/RePEc:inm:ororsc:v:12:y:2001:i:6:p:772-777

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