Real Options: Managing Strategic Investment in an Uncertain Worl

I was rather disappointed by this book. I was hoping for something which could help explain to business managers why processes such as IT delivery are uncertain, and the value of delivering flexible solutions. The initial part of the book makes a lot of strong qualitative statements of exactly the right sort:- There is great value in breaking up large projects in uncertain markets- Options (flexibility) create value out of uncertain events.- Exit options which allow you to step away from a planned path, even if relatively expensive, may have significant value.- An option such as an exit option, can make an investment viable when it would fail a traditional NPV test.- Small speculative investments can enable larger investments to benefit from learning and to be much more accurately targeted.- It may create greater value to start many projects and abandon more, rather than aiming to abandon a minimum number.Unfortunately the remainder of the book then supports these statements only for a very limited set of circumstances. The Real Options approach only seems to work if the option can be translated into (or at least mapped onto) a tradeable financial security. There's no real attempt to provide tools to evaluate internal uncertainty, such as the delivery uncertainty common in IT projects, or the value of flexibility except where it maps to significant investment decisions.The book does do a good job of explaining that real world situations are non-linear, with value which changes as a result of natural volatility, over time, and as a result of one or more decisions. Traditional NPV-based approaches greatly undervalue flexibility, insurance, learning and platform investments, and can't really deal with this non-linear aspect. Simply increasing the investment discount rate, which is the usual way of dealing with such problems, doesn't bring the correct focus onto uncertainty and total risk.However, the mathematical basis for Real Option valuation is not well explained, and I found the processes difficult to follow. I suspect that the authors implicitly assumed a certain familiarity with economic and financial market techniques and terminology, which limits the value of this book to those seeking, as I was, to apply the techniques to other fields. It also left me puzzled as to why simpler approaches, such as Decision Tree techniques, can't be used instead.Surprisingly for a relatively short book the text is very repetitive, and too often turns into a blatant advert for the Real Options approach compared with others, rather than making the case on its own merits. This book provides some good ideas, and if your focus is major business-critical financial transactions it may be very useful. But I'm still looking for a good book on how to generically value flexibility.

great

I enjoyed reading this book and found this informative as well as practical. Excellent content, good writing style. Giving 4 stars because this is a bit dated in some areas. Still a good read.

I thought it could have been slightly more technical, but great to get acquainted with real options for a practitioner.

Un libro que estuve esperando debido a que es un tema que utilizaré para obtener el grado de Ingeniero Petroquímico, por lo poco que conozco del tema este libro ayudará a tener una mejor aproximación en cuanto a la toma de decisiones como una actividad primaria dentro de una empresa y ser capaz de evaluar cuando invertir, cuando salir, cuando invertir en lapsos de tiempo o cuando abandonar el proyecto.