Making Sense of Real Options Reasoning: An Engine of Choice that Backfires?

M. L. Barnett & R. L. M. Dunbar, THE OXFORD HANDBOOK OF ORGANIZATIONAL DECISION MAKING, G. Hodgkinson & W. Starbuck, eds., pp. 383-398, Oxford, UK: Oxford University Press, 2008

17 Pages Posted: 14 Jul 2008 Last revised: 17 Jul 2008

See all articles by Michael L. Barnett

Michael L. Barnett

Rutgers Business School, Newark & New Brunswick

Roger L. M. Dunbar

New York University (NYU) - Department of Management and Organizational Behavior

Date Written: July, 14 2008

Abstract

This chapter traces the development of real options reasoning (ROR) and details how problems in assessing the value of real options have made ROR as initially proposed difficult to implement. The paper then describes how in practice, instead of focusing on explicit valuation, organizations usually use analogous reasoning to develop, select and implement options that enable strategic flexibility and so enhance value. An illustrative case demonstrates how financial options can help this process by buffering core operations from changing market environments. The same illustration also shows that ROR fails to simultaneously create future choices while limiting costs. Moreover, where it does generate future choices, it does not prevent decision-makers from making poor choices. Thus, the engine of choice that ROR suggests organizations should create may in fact backfire on those decision-makers who try to implement it.

Keywords: real options reasoning

JEL Classification: L23, M11

Suggested Citation

Barnett, Michael L. and Dunbar, Roger L. M., Making Sense of Real Options Reasoning: An Engine of Choice that Backfires? (July, 14 2008). M. L. Barnett & R. L. M. Dunbar, THE OXFORD HANDBOOK OF ORGANIZATIONAL DECISION MAKING, G. Hodgkinson & W. Starbuck, eds., pp. 383-398, Oxford, UK: Oxford University Press, 2008. Available at SSRN: https://ssrn.com/abstract=1159760

Michael L. Barnett (Contact Author)

Rutgers Business School, Newark & New Brunswick ( email )

NJ
United States

HOME PAGE: http://www.business.rutgers.edu

Roger L. M. Dunbar

New York University (NYU) - Department of Management and Organizational Behavior ( email )

44 West 4th Street
New York, NY 10012
United States

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