MAKING USE OF REAL OPTIONS SIMPLE: AN OVERVIEW AND APPLICATIONS IN FLEXIBLE/MODULAR DECISION MAKING
This article focuses on how the use of real options can be made simple, providing an overview of the power of flexible and modular decision making and its use in various applications across industries. After common real options are discussed through a comprehensive example, the article reviews the key lessons and implications of real options thinking for flexible decision making. It then proceeds to propose a modular problem structuring approach that allows simplifying of complex real option problems by decomposing them into a few basic building-block option types (reviewed) connected by some basic decision operators. The resulting problem-structuring option map is depicted in a range of illustrative applications in various industries. Past areas of application of real options as well as research challenges ahead are also discussed.
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Document Type: Research Article
Affiliations: Bank of Cyprus Chair Professor of Finance, University of Cyprus, Nicosia, Cyprus and President, Real Options Group
Publication date: January 1, 2005