Editing Real options valuation (section)

==Scope==
Real options are generally distinguished from conventional financial options in that they are not typically traded as securities, and do not usually involve decisions on an underlying asset that is traded as a financial security.<ref>Amram, M., and K. N. Howe (2003), [http://www.csn.ul.ie/~karen/Articles/Real%20Options.pdf Real Options Valuations: Taking Out the Rocket Science], Strategic Finance, Feb. 2003, 10-13.</ref> A further distinction is that option holders here, i.e. management, can directly influence the value of the option's [[underlying]] project; whereas this is not a consideration regarding the underlying security of a financial option. Moreover, management cannot measure uncertainty in terms of [[volatility (finance)|volatility]], and must instead rely on their perceptions of uncertainty. Unlike financial options, management must also create or discover real options, and such creation and discovery process comprises an entrepreneurial or business task.

Real options analysis, as a discipline, extends from its application in [[corporate finance]], to [[Decision theory#Choice under uncertainty|decision making under uncertainty]] in general, adapting the techniques developed for [[option (finance)|financial options]] to "real-life" decisions. For example, [[R&D]] managers can use real options valuation to help them deal with various uncertainties in making decisions about the allocation of resources among R&D projects.<ref>{{Cite journal|last1=Trigeorgis|first1=Lenos|author-link2=Jeffrey J. Reuer|last2=Reuer|first2=Jeffrey J.|date=2017|title=Real options theory in strategic management|journal=Strategic Management Journal|language=en|volume=38|issue=1|pages=42–63|doi=10.1002/smj.2593|issn=1097-0266}}</ref><ref>{{Cite journal|last1=Oriani|first1=Raffaele|last2=Sobrero|first2=Maurizio|date=2008|title=Uncertainty and the market valuation of R&D within a real options logic|journal=Strategic Management Journal|language=en|volume=29|issue=4|pages=343–361|doi=10.1002/smj.664|issn=1097-0266}}</ref><ref>{{Cite journal|last1=Huang|first1=Hsini|last2=Jong|first2=Simcha|date=2019|title=Public Funding for Science and the Value of Corporate R&D Projects; Evidence from Project Initiation and Termination Decisions in Cell Therapy|journal=Journal of Management Studies|language=en|volume=56|issue=5|pages=1000–1039|doi=10.1111/joms.12423|issn=1467-6486|doi-access=free|hdl=1887/74625|hdl-access=free}}</ref><ref>{{Cite journal|last1=Gunther McGrath|first1=Rita|last2=Nerkar|first2=Atul|date=January 2004|title=Real options reasoning and a new look at the R&D investment strategies of pharmaceutical firms|journal=Strategic Management Journal|language=en|volume=25|issue=1|pages=1–21|doi=10.1002/smj.358|issn=0143-2095}}</ref> Non-business examples might be evaluating the cost of [[cryptocurrency]] mining machines,{{sfn|Yaish |Zohar |2020 }} or the decision to join the work force, or rather, to forgo several years of income to attend [[graduate school]].<ref>See Bilkic et al. under [[#Applications]].</ref>  It, thus, forces decision makers to be explicit about the assumptions underlying their projections, and for this reason ROV is increasingly employed as a tool in [[business strategy]] formulation.<ref name = "Pettit">Justin Pettit: [http://pages.stern.nyu.edu/~adamodar/pdfiles/eqnotes/opt3.pdf ''Applications in Real Options and Value-based Strategy'']; Ch.4. in Trigeorgis (1996)</ref><ref name="Sammer">Joanne Sammer: [http://businessfinancemag.com/print/5564 Thinking in Real (Options) Time], businessfinancemag.com</ref><ref name="Shimko">David Shimko (2009). [https://web.archive.org/web/20100405121617/http://www.qfinance.com/business-strategy-best-practice/real-options-opportunity-from-risk?full Real Options: Opportunity from Risk]. archived 2010-04-05.</ref> This extension of real options to real-world projects often requires customized [[decision support system]]s, because otherwise the complex compound real options will become too intractable to handle.<ref name = "Zhang & Babovic">{{cite journal |last1=Zhang |first1=S.X. |last2=Babovic |first2=V. |year=2011 |title=An evolutionary real options framework for the design and management of projects and systems with complex real options and exercising conditions |journal=Decision Support Systems |volume=51 |issue=1 |pages=119–129 |doi= 10.1016/j.dss.2010.12.001|s2cid=15362734 |url=https://www.researchgate.net/publication/220197192}}</ref>