Making Sense of Real Options Reasoning: An Engine of Choice that Backfires?

This chapter traces the development of real options reasoning (ROR) and details how problems in assessing the value of real options have made ROR as initially proposed difficult to implement. The paper then describes how in practice, instead of focusing on explicit valuation, organizations usually use analogous reasoning to develop, select and implement options that enable strategic flexibility and so enhance value. An illustrative case demonstrates how financial options can help this process by buffering core operations from changing market environments. The same illustration also shows that ROR fails to simultaneously create future choices while limiting costs. Moreover, where it does generate future choices, it does not prevent decision-makers from making poor choices. Thus, the engine of choice that ROR suggests organizations should create may in fact backfire on those decision-makers who try to implement it.

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