Real Options as Engines of Choice and Heterogeneity

Abstract

Four characterizations of options exist: (1) as a component of total firm value, (2) as specific projects, (3) as choices, and (4) as a heuristic for strategic investment. Option value exists when two conditions apply: future choices and potential for proprietary access to outcomes. Narrower boundary conditions are inconsistent with theory and incomplete for application. The option lens has promise for its power to shed economic insight into behavioral processes.