Are “Real Options” Actually Used in the Real World?

Abstract

The inability of classic NPV analysis to capture the future value of options in a capital budgeting analysis is now well documented by Trigeorgis (1993 Trigeorgis, L. 1993. Topics in real options and applications. Financial Management, 22(3): 202–223. [Crossref], [Web of Science ®] , [Google Scholar], 2005 Trigeorgis, L. 2005. Making use of real options simple: An overview and applications in flexible/modular decision making. The Engineering Economist, 50(1): 25–53. [Taylor & Francis Online] , [Google Scholar]), Copeland and Antikarov (2001) Copeland, T. and Antikarov, V. 2001. Real options: A practitioner's guide, New York: TEXERE LLC. [Google Scholar], and others. In spite of this, traditional NPV analysis continues to be described as a normative approach. The author surveys Fortune 1,000 companies to see if they have picked up on the use of real options to complement traditional analysis. Out of 279 respondents, 40 were currently using real options (14.3%). While the percentage is small, the number is higher than in previous studies. The author goes on to describe in what manner real options are being used and, of equal importance, why they are resisted by many. Somewhat encouraging is the intent of well over half the nonusers to consider the use of real options in the future.