Real Options for Playstation

15 Pages Posted: 13 Sep 2007

See all articles by Giampiero Favato

Giampiero Favato

Institute of Leadership and Management in Health - Kingston University

Roger Mills

Henley Management College - Henley Centre for Value Improvement (HCVI)

Date Written: August 2007

Abstract

In 1973, Black, Scholes and Merton published two path-breaking papers on rational pricing of financial options, the right, but not the obligation, to buy or sell a stock in the future at a given price. This new approach to the evaluation of financial projects vividly inspired the academic community: over eleven thousands papers have been published on Real Options so far. Yet, thirty-five years after the publication of the first paper, Real Options have penetrated the decision-making processes of large corporations very slowly.

Although the general concept of real options is clear, their specific benefits for individual investment decisions are not. Options are still an obscure mathematical tool and the partial differential equation at the core of the option pricing model leaves management with a blank face. The complexity of the stochastic calculus is preventing practitioners from seeing the new decision space created by Real Options and from moving inside this space at ease.

This paper reviews the entire development of Real Options research, taking a completely new direction inspired by the unique goal of achieving relevance in management's eyes. The graphical representation of the Ito's lemma, the partial differential equation central to the Black and Scholes pricing model, would help practitioners to visually capture the essence of Real Option thinking.

How different would the development of real Options have been if it had originally been designed as a video game?

Keywords: real, option, pricing, asset, management, relevance, video game

JEL Classification: C73, G12

Suggested Citation

Favato, Giampiero and Mills, Roger, Real Options for Playstation (August 2007). Available at SSRN: https://ssrn.com/abstract=1012663 or http://dx.doi.org/10.2139/ssrn.1012663

Giampiero Favato (Contact Author)

Institute of Leadership and Management in Health - Kingston University ( email )

Kingston Hill
Kingston upon Thames
Surrey KT2 7LB
United Kingdom

Roger Mills

Henley Management College - Henley Centre for Value Improvement (HCVI) ( email )

Greenlands
Henley-on-Thames
Oxfordshire RG9 3AU, England
United Kingdom

HOME PAGE: www.henleymc.ac.uk/hcvi

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