The Dark Side of Valuation: Valuing Young, Distressed, and Complex Businesses, Second Edition

Conclusion

In contrast to the approaches that focus on downside risk—risk-adjusted value, simulations, and decision trees—the real options approach brings an optimistic view to uncertainty. While conceding that uncertainty can create losses, it argues that uncertainty can also be exploited for potential gains and that updated information can be used to augment the upside and reduce the downside risks inherent in investments. In essence, you are arguing that the conventional risk-adjustment approaches fail to capture this flexibility and that you should add an option premium to the risk-adjusted value.

This chapter considered three potential real options and applications of each. The first is the option to delay. This is where a firm with exclusive ...