Real options

Many project investment decisions are the result of significant analysis of various projects. The decision is based on analyses and the assumption that the organization commits large sums of money upfront to a project, and if the project fails, the company has lost most if not all of the investment. This approach can be risky as the business environment changes. The viability of a project can be seriously questioned if the assumptions that led to a project being selected have changed. In the same way, a project that appeared unfeasible can become viable with changes in the business environment. 

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Much of the apparent complexity of current approaches to real-options analysis arises from the attempt to fit financial-option formulae to real-world problems. Usually this does not work since real-world options are often quite different from financial options. Option-pricing formulae are treated as a pro-crustean bed by academics Either the real world is simplified beyond recognition or unwarranted assumptions are added to make the facts fit the theory. Neither approach satisfies managers. 

Gupta A, Maranas CD (2004) Real-Options-Based Planning Strategies under Uncertainty. Industrial Engineering Chemistry Research 43 3870-3878... 

McGrath (1999) explores what she terms an anti-failure bias, which she suggests limits entrepreneurial processes. She defines real options as investment(s) in real assets that preserve the right to make a decision... 

McGrath, R. G. 1997. A real options logic for initiating technology positioning investments. Academy of Management Review, 22 974-996. 

Falling forward real options reasoning and entrepreneurial failure. Academy of Management Review, 24 13-30. 

Promotional activity and the dissemination of information are so closely linked that it is hard to see where one ends and the other begins. In the modern era, where many pairs of eyes are on the industry s activities, eager to criticise and to control, the only real option for companies is to conform to the rules and to play fair. I would suggest that since companies act by SOPs for their conduct of clinical trials, so it makes sense to have an SOP for the preparation and approval of ethical promotional material. If one does not create written procedures to cover the multiple steps in the preparation and approval of promotional copy, mistakes can be made and complaints may follow. 

In the last chapter you heard Mike describe the tortures of going up and down on different medications, each of which had distinctive side effects. A few years ago Peter Kramer, the author of Listening to Prozac wrote a book about human relationships entitled Should You Leave The book explores perennially significant questions about intimacy and autonomy— How do we choose our partners How well do we know them How do mood states affect our assessment of them and theirs of us When should we work to improve a relationship, and when should we walk away In essence, Kramer could have raised these same questions in his book on Prozac. In the following instances, however, experiments were abject failures and the only real option was to walk away ... 

Farrow, S. (2004). Using risk assessment, benefit-cost analysis, and real options to implement a precautionary principle. Risk Anal. 24(3) 727-738. 

Consequences of Refusal of Treatment. The translation of the abstract right-to-refuse issue into real-world outcomes reveals serious consequences that are more complicated than may be assumed. For example, there is reliable research showing that psychotherapy without medication is not effective in treating such severe disorders as schizophrenia (20, 21). Therefore, when medication is refused, often no effective, alternate, less restrictive treatment is available, and the only other real option is no treatment. 

Vol. 587 P. N. Baecker, Real Options and Intellectual Property Capital Budgeting Under Imperfect Patent Protection. X, 276 pages, 2007. 

These are classic results of real option theory. See Baldursson and von der Fehr (2004) for a more sophisticated discussion of this issue. 

Amram, M. Kulatilaka, N. Real Options , Harvard Business School Press, 1999. 

Although Real Options uses a sophisticated mathematical model to make the numerical calculations, the analysis, an extension of classic financial options theory, is based on the data and opinions provided by the managers themselves instead of having been parachuted in by a consultant-provided ABS study. This method captures the expert judgment of managers and allows it to become a source of competitive advantage over time. 

The use of microelectrodes is impractical, but the use of ensembles of microelectrodes can be a real option. The ensemble of microelectrodes consists of microelectrodes placed on the inert surface at distances between their centers larger than their diameter. 

For further discussion of the Pearson index in project management see Burman et al. (2007), Burman and Senn (2003), Regan and Senn (1997), Senn (1996, 1998a) and Senn and Rosati, 2002) for its relation to the Neyman-Pearson lemma see Talias (2007) and for real option theory see Dixit and Pyndick (1994). 

The two real options for resolution optimization are illustrated in Figure 2.12a-c. 

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