Intellectual Property: Valuation, Exploitation and Infringement Damages 2013 Cumulative Supplement, 11th Edition

CHAPTER 12B

DEALING WITH RISK AND UNCERTAINTY IN INTELLECTUAL PROPERTY VALUATION AND EXPLOITATION (NEW)

WILLIAM J. M URPHY

  12B.1 RISK VERSUS UNCERTAINTY

  12B.2 DECISION ANALYSIS AND DECISION TREES

  12B.3 DECISION TREE COMPONENTS AND CONVENTIONS

  12B.4 MONTE CARLO TECHNIQUES

  12B.5 MARKOV CHAINS

  12B.6 OBTAINING INFORMATION FROM INDIRECT OBSERVATION: SHADOW PRICING

  12B.7 BAYESIAN ANALYSIS

  12B.8 OPTION PRICING MODELS

  12B.9 LIMITATIONS ON RATIONALITY IN DECISION MAKING: THE EFFECTS OF PERCEPTION AND BIASES ON DECISION MAKING

12B.10 CONCLUSION

Determining the future benefits of ownership is at the heart of all three methods of valuation: the cost approach,¹ the market approach,² and the income approach.³ As the reader can easily imagine, the valuation problem under each approach becomes one of looking into the future to determine what those future benefits might be. Since no one has a crystal ball of sufficient clarity to precisely calculate this benefit stream, the search for methods that can assist in the forecasting process has drawn widespread attention.

The standard method for incorporating future risks into income valuation calculations is through the discount rate.⁴ The main short-coming is the loss of information because the discount rate is an accumulation of future risk and uncertainty estimates and predictions rolled into a single number. As a consequence of this aggregation, important distinctions can be lost and insights can be occluded by generalization. ...