Valuing technology investments: use real options thinking but forget real options valuation

P R Steffens; Evan J Douglas

doi:10.1504/IJTE.2007.013270

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Valuing technology investments: use real options thinking but forget real options valuation

Journal article

Open access

Peer reviewed

Valuing technology investments: use real options thinking but forget real options valuation

P R Steffens and Evan J Douglas

International Journal of Technoentrepreneurship, Vol.1(1), pp.58-77

2007

DOI: https://doi.org/10.1504/IJTE.2007.013270

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Abstract

Business and Management

technology investments

real options

valuation

Decision Tree Analysis (DTA)

When facing risky technology investments or ventures 'real option thinking' - the managerial flexibility to capitalise on opportunities when they arise and/or to minimise the impact of threats - is precisely what is needed. Notwithstanding this, we argue Real Options Valuation (ROV) is inferior to traditional decision tree analysis for this context. Our reasoning is twofold. Firstly, ROV techniques provide a sophisticated treatment of market risks, but do not deal with firm-specific risks. However, the elevated risk facing technology ventures is predominantly firm-specific risk. Secondly, ROV has a severe practical limitation for new technology ventures. The starting point for ROV is to value the "underlying asset" - the venture/project in the absence of the 'real options' - using discounted cash flow techniques. But the risk profile/discount rate can not be established for this nonsensical hypothetical entity - because the 'real options' are an integral part of technology venture.

Details

Title: Valuing technology investments: use real options thinking but forget real options valuation
Authors: P R Steffens (Author) - Queensland University of Technology
Evan J Douglas (Author) - Queensland University of Technology
Publication details: International Journal of Technoentrepreneurship, Vol.1(1), pp.58-77
Publisher: Inderscience Publishers
Date published: 2007
DOI: 10.1504/IJTE.2007.013270
ISSN: 1746-5370
Copyright note: Copyright © Inderscience Enterprises Ltd. The author's accepted version is reproduced here in accordance with the publishers copyright policy. International Journal of Technoentrepreneurship. Vol 1:2007. http://www.inderscience.com/storage/f121069537111248.pdf
Organisation Unit: University of the Sunshine Coast, Queensland
Language: English
Record Identifier: 99449888502621
Output Type: Journal article

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