Using Scenario Thinking to Make Real Options Relevant to Managers: A Case Illustration

This paper illustrates how the beneficial application of Real Options to decision making brings it down from the esoteric heights of mathematics, converts it into a technique readily accessible to managers and qualifies it for inclusion in the curriculum of management education.

Abstract

This paper argues the advantages of Real Options thinking and by means of examples, exhibits the types of decision-making calculations that are distinctive to Real Options. However, in the process of clarifying the application of Real Options analysis to real decision making, a strong dependency upon scenario thinking is established. The value to decision makers of Real Options depends crucially on the substance and use of the scenarios on which it rests. The distinctive contribution of this paper consists in substantiating this view. By forging a critical link between Real Options analysis and scenario thinking, this paper illustrates how the beneficial application of Real Options to decision making brings it down from the esoteric heights of mathematics, converts it into a technique readily accessible to managers and qualifies it for inclusion in the curriculum of management education. Two cases drawn from personal experience are used to illustrate the approach recommended by the authors.