This article provides a unified framework for analyzing a wide variety of real option problems. These problems include the frequently studied, simple real option problems, as described in Dixit and Pindyck (1994) for example, but also problems with more complicated and realistic assumptions. We reveal that all the real option problems belonging to the more general class considered in this study...

The common paradigm for risk-neutral real-option pricing is a special case encompassed within our general model for valuing investment opportunities. Risk-neutral real option prices deviate from the risk-averse real option values that apply in an incomplete market, giving different rankings of investment opportunities and different optimal exercise strategies. Unlike risk-neutral prices, more g...

Purpose of the paper This paper examines how the real option theory is applicable to evaluation of cases of escalation and premature termination of Management Information Systems (MIS) projects. Design/methodology/approach We compare the implications of psychological and economic escalation theories with lessons from the real option theory as applied to MIS projects. Then, we examine published ...

In this paper we show how a multidimensional American real option may be solved using the LSM simulation method originally proposed by Longstaff and Schwartz [2001, The Review of the Financial Studies 14(1): 113–147] for valuing a financial option and how this method can be used in a complex setting. We extend a well-known natural resource real option model, initially solved using finite differ...

This paper extends the marketed asset disclaimer approach for real option valuation. In sharp contrast to the dominant real option valuation that assumes a stochastic process for an investment’s capital value, this paper demonstrates the valuation of a real option assuming that cash flow follows a stochastic process. We show that this method is at least equally effective and sometimes more intu...