Real options logic in R&D project valuation

Jeffrey N. Street (College of Business, Idaho State University, Pocatello, Idaho, USA)
Mukunthan Santhanakrishnan (College of Business, Idaho State University, Pocatello, Idaho, USA)

Journal of Strategy and Management

ISSN: 1755-425X

Publication date: 17 May 2011

Abstract

Purpose

Decision making for acceptance of an R&D project occurs under uncertainty and may involve predominantly quantitative analyses, such as net‐present value, predominantly intuitive analyses, such as real options logic, or some combination thereof. This paper attempts to bring together two concepts of decision theory, i.e. heuristics and framing, and real options logic into one integrated view relative to R&D project valuation. It is believed that the integration of theory helps explain expected and unexpected decisions resulting from the R&D project valuation process.

Design/methodology/approach

It is proposed here that, under a typical R&D project review, aspects of two theoretical concepts integrate to aid project valuation and decision making. The aim of this paper is to develop a research framework leading to advancement in the understanding of the relationship of heuristic principles from decision theory and the valuation methodology of real options logic. Findings – As a conceptual paper, propositions and a research model representing the conceptual framework are presented.

Research limitations/implications

Stemming from the propositions and research model, it is believed that the degree of influence that heuristics potentially exhibit on real options logic can be successfully measured. Confirming the degree of influence is a matter for future empirical research.

Originality/value

The originality of this paper is to develop a research framework leading to advancement in the understanding of the relationship of heuristic principles from decision theory and the valuation methodology of real options logic. In this framework, heuristics has been positioned as a moderator affecting project valuation derived by real options logic.

Keywords

Citation

Street, J. and Santhanakrishnan, M. (2011), "Real options logic in R&D project valuation", Journal of Strategy and Management, Vol. 4 No. 2, pp. 155-171. https://doi.org/10.1108/17554251111128628

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Publisher

:

Emerald Group Publishing Limited

Copyright © 2011, Emerald Group Publishing Limited

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