Traditional Real Options

• This method has been suggested by Stewart C. Myers from the MIT Sloan School of Business in 1977. He brilliantly introduced the mindset of option-thinking in real world business cases.

• The numerical implementation is derived from the pricing method for stock options, see Black & Scholes (Nobel Prize). Unfortunately, the underlying business assumptions are not expressed in familiar ways (e.g., geometric stochastic processes, volatility) and do not necessarily match real world conditions (e.g., constant observation capabilities).

• Another issue is the limitation to binary project trees. This does not necessarily match the real course of action of adaptive projects.

• The implementation of this method requires strong financial expertise.

• Despite the enthusiasm for option concepts, the complex implementation did prevent traditional real options to go mainstream.