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Strategic Risk Taking: A Framework for Risk Management by Aswath Damodaran

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Chapter 8. Real Options

The approaches that we have described in the past three chapters for assessing the effects of risk, for the most part, have focused on the negative effects of risk. Put another way, they have all focused on the downside of risk, and they miss the opportunity component that provides the upside. The real options approach is the only one that gives prominence to the upside potential for risk, based on the argument that uncertainty can sometimes be a source of additional value, especially to those who are poised to take advantage of it.

We begin this chapter by describing in very general terms the argument behind the real options approach, noting its foundations in two elements—the capacity of individuals or entities to learn ...

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