The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

5. Real Options Valuation

The approaches we have described in the last three chapters for assessing the value of an asset are mainly focused on the negative effects of risk. Put another way, they are all focused on the downside of risk; they miss the opportunity component that provides the upside. The real options approach is the only one that gives prominence to the upside potential for risk. Uncertainty can sometimes be a source of additional value, especially to those who are poised to take advantage of it.

We begin this chapter by describing in very general terms the argument behind the real options approach, noting its foundations in two elements:

• The capacity of individuals or entities to learn from what is happening around them

• Their willingness ...