Love, Death and Taxes: Applications of Real Options 'in' Economic Systems
49 Pages Posted: 13 May 2011
Date Written: May 1, 2008
Abstract
Love, death and taxes – these are the inevitable, yet uncertain and risky, events of which life cycles and systems are composed. While we normally think of them in terms of human life cycles, they can be applied to economic life cycles as well, under different names. The description and quantification of love, death and taxes in human life are under the purview of the social scientists, statisticians, actuaries, and poets. But the description and quantification of these in economic systems remains the task of economists, finance and valuation professionals. As economic systems become increasingly more complex and dynamic and the universal language of historical accounting is being altered, the theory and tools we use in economics, finance, and valuation are beginning to prove inadequate to the tasks being required of them. Hence, there is a need to consider new avenues of thought and new tools. In this paper, we explore the potential use of real options “in” systems design as a means to achieve more rigorous and insightful results in the design and valuation of the economic system of the firm.
Keywords: economic systems, economic systems design, valuation, real options
JEL Classification: G32, G39
Suggested Citation: Suggested Citation