Real option perceptions among project managers

• Published in: Risk management (Leicestershire, England) Vol. 13; no. 3; pp. 122 - 146
• Main Authors: Ford, David N., Lander, Diane M.
• Format: Journal Article
• Language: English
• Published: London Palgrave Macmillan 01.07.2011; Palgrave Macmillan UK
• Subjects: Cash flow; Corporate finance; Costs; Decision making; Decision trees; Development; Development projects; Discount rates; Discounted cash flow; Economic models; Economics and Finance; Ethnic groups; Finance; Flexibility; Investment strategies; Lump sum; Minimization of cost; Modeling; Original Article; Perception; Project management; Publishing industry; R&D; Real options analysis; Research & development; Research programs; Risk Management; Simulation; Simulations; Studies; Unit costs; Valuation; real options; risk management; flexibility; uncertainty; simulation
• ISSN: 1460-3799; 1743-4637
• DOI: 10.1057/rm.2011.8

Effective and efficient planning for and management of project risk requires the management of uncertainty. Real options can be an effective tool for managing uncertainty and thereby increasing project value. As most managers do not use real options, but instead intuitively manage uncertainty, understanding the similarities and differences between decision-maker perceptions of real options and real options theory is critical for improving the use of real options for risk management. In the current work, an experiment using a simple uncertain development project and a simulation model capture managers' perceptions of real options, including option values. Results show that subjects valued flexibility and conceptually understood option values in ways consistent with theory. Implications for real options research and development are discussed.