Application of option pricing theory to R&D

Abstract

Abstract Much attention has been paid in the literature to methods for the evaluation and selection of R&D projects. The evidence is that these are less extensively used than might be expected. More recently, an approach based on Option Pricing Theory has been suggested as one which is likely to be of considerable value to management. In this paper the method is described, the information which is required is identified and the way in which it might be applied in practice is discussed.