Financial Strategy, Second Edition

4

Realizing the Potential of Real Options

Does Theory Meet Practice?

Alexander Triantis

The Annual Real Options Conference, now in its seventh year, has been a useful forum for the exchange and debare of new ideas about corporate strategy and valuation. The tag line for the conference, “Theory Meets Practice,” reflects the goal of bringing together academics and practitioners to explore new approaches for making capital investment decisions and adapting such approaches for practical application. And given the presence of both academics and practitioners in this audience, a natural topic for my talk today comes from simply transforming the tag line into a question, “Does Theory Meet Practice?” Is the gap between theory and practice closing, and what can we do to speed this up?

The idea of viewing corporate investment opportunities as “real options” has been around for more than 25 years – in fact, it dates back to Stewart Myers' use of the phrase in his well-known 1977 article.¹ Since then, the idea has had a huge impact on academic research. Based on a literature database that I've maintained since the late 1990s, I estimate there are now nearly 1,000 research papers that incorporate real options ideas.² Real options concepts and techniques have not only become prevalent in research in finance and economics, but have also more recently influenced research in virtually every business discipline, including strategy, organizations, management science, operations management, information ...