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The interpretation and valuation of real options by means of options pricing theory can be regarded as a relatively new paradigm of investment theory. Option pricing theory based investment valuation represents a sound theoretical basis and offers principally a simple decision base. The approach recognises entrepreneurial flexibility and risk explicitly. It implies a positive correlation between flexibility respectively uncertainty and the value of options. Traditional deterministic‐dynamic standard methods of valuation are not able to value flexibility or risk effectively so that option values are adequately reflected. As property investors gradually embrace modern financial concepts it is clear that real estate valuation theory will have to change. One of the most promising areas that could have an important implication on the further development of valuation is the application of the real options paradigm. The author investigates the transfer of general real options theory through an examination of academic results in the field of real estate development. He comes to the conclusion that current research generates highly academic‐abstract results with limited practical value. So far a limited number of quantitative studies regarding the valuation real estate projects with the real options method have been conducted. Practical valuations have yet to be comprehensively carried out. For doing so, further research concerning the basic prerequisites of real options theory has to be undertaken.

This survey explores the application of real options theory to the field of health economics. The integration of options theory offers a valuable framework to address these challenges, providing insights into healthcare investments, policy analysis and patient care pathways.

This research employs the real options theory, a financial concept, to delve into health economics challenges. Through a systematic approach, three distinct models rooted in this theory are crafted and analyzed. Firstly, the study examines the value of investing in emerging health technology, factoring in future advantages, associated costs and unpredictability. The second model is patient-centric, evaluating the choice between immediate treatment switch and waiting for more clarity, while also weighing the associated risks. Lastly, the research assesses pandemic-related government policies, emphasizing the importance of delaying decisions in the face of uncertainties, thereby promoting data-driven policymaking.

Three different real options models are presented in this study to illustrate their applicability and value in aiding decision-makers. (1) The first evaluates investments in new technology, analyzing future benefits, discount rates and benefit volatility to determine investment value. (2) In the second model, a patient has the option of switching treatments now or waiting for more information before optimally switching treatments. However, waiting has its risks, such as disease progression. By modeling the potential benefits and risks of both options, and factoring in the time value, this model aids doctors and patients in making informed decisions based on a quantified assessment of potential outcomes. (3) The third model concerns pandemic policy: governments can end or prolong lockdowns. While awaiting more data on the virus might lead to economic and societal strain, the model emphasizes the economic value of deferring decisions under uncertainty.

This research provides a quantified perspective on various decisions in healthcare, from investments in new technology to treatment choices for patients to government decisions regarding pandemics. By applying real options theory, stakeholders can make more evidence-driven decisions.

Decisions about patient care pathways and pandemic policies have direct societal implications. For instance, choices regarding the prolongation or ending of lockdowns can lead to economic and societal strain.

The originality of this study lies in its application of real options theory, a concept from finance, to the realm of health economics, offering novel insights and analytical tools for decision-makers in the healthcare sector.

The purpose of this paper is to examine how the real option theory is applicable to evaluation of cases of escalation and premature termination of Management Information Systems (MIS) projects.

The paper compares the implications of psychological and economic escalation theories with lessons from the real option theory as applied to MIS projects. Then, it examines published case studies, and discuss when project continuation enhances and reduces value for the manager and the firm.

Escalation of commitment is continuation of an investment project after receiving negative signals. Escalation was identified as a significant problem in MIS projects often explained by the desire of the manager to avoid recognizing mistakes and to protect reputation. The opposite problem of premature termination of certain investment projects was also identified. This study argues that accurate application of real option theory is critical to distinguish between escalation and premature termination. Under the real option theory, an investment project is analogous to a financial option, in that there is an opportunity to continue the project, but no obligation. Continuation has value when there is uncertainty and new information about the project may be revealed. Failure to account for the real options in a project is value‐reducing as it may lead to mistakes in premature termination of projects when projects with real option value are labeled as cases of irrational escalation.

The paper details the implications of real option theory to evaluating project continuation in the MIS setting.

This paper applies insights from real option theory to studies of escalation in MIS. Continuing a project may be seen as escalation when it actually has value for the firm, as new information received by continuing the project reduces uncertainty.

The purpose of this paper is to construct option pricing models for real estate development by considering and incorporating institutional arrangements, direct interactions and financial constraints in the model. It extends the application of real option theory from the framework borrowed from financial option pricing, and considers the case where a development company has restrictions from outside environment and financial constraint. It explores the effects of these additional practical factors on real asset project value and development timing. This paper makes contributions to bridge the theoretical models and practical applications.

Real estate development is modelled in the binomial option pricing framework with the considerations of time‐to‐build, foregone rent if delaying, institutional environment and capital budgeting. The investment timings are derived from the models and sensitivity analysis is conducted to explore the effects of these factors.

Apart from the factors in traditional option pricing theory, this paper confirms that the contractual covenants, positive synergies between properties and financial status of the firm, which enhance or restrict real flexibility embedded in the development land, influence project value and investment timing. Numerical examples illustrate the effects of these factors. It is argued that the valuation of real options should place emphasis on industry‐specific characteristics and start from the perspective of the firm rather than individual options.

The models constructed in this paper and the results can be directly used in the practical real estate development.

This paper incorporates many practical factors in real estate development which are not investigated in previous studies. It values the option project from the firm perspective rather than project perspective as previous studies. It also shows the effects of institutional arrangement and firm factors on project value and development timing.

The purpose of this research is to examine the way uncertainty plays a role in built land prices. This paper provides basic real option pricing models of land prices on the demand side in central Tokyo. The model in this research analyzes micro land prices covering individual lot data provided by the Land Price Index. Since land prices are determined by both macro economic environment and micro lot‐specific attributes, this paper utilizes both time‐series economic data and cross‐sectional lot‐specific data. The model incorporates both time‐series (macro) and cross‐sectional (micro) data including uncertainty terms. In addition to the total uncertainty in asset prices over years, this research also gives some ideas of cross‐sectional uncertainty in land price variations by utilizing cross‐sectional amenity variables. These cross‐sectional and time‐series variables including the two uncertainty variables are arithmetically combined and the OLS method is conducted. The data set consists of 4,368 land price data from 1985 through 2000. The results from the option‐based models favor the application of the real option theory in land prices. The total uncertainty with respect to built asset return has a substantial effect on increasing land prices, which implies that an increase in uncertainty leads to an increase in land prices.

Reports on a survey which asked 82 experienced managers from various functions, business levels, and industries to value case studies which were in effect real options on growth. Compares these empirical valuations with theoretical values derived from a specific real options model (European non‐dividend paying). In a questionnaire survey, participating managers showed high levels of agreement with various statements needed as assumptions in the real options model. They also accepted as realistic most of the parameter settings used in the experiment. Results imply that training is needed and likely to be acceptable to managers, and underinvestment could be explained by an inability to perceive option values. Choosing teams of decision makers may reduce the variance (but not the bias) of intuitive option valuations.

Real options theory has been used to examine how manufacturing firms make incremental investments under conditions of uncertainty. However, it has not been extensively applied to service firms. Using real options theory, the purpose of this article is to explore how service firms make platform investments.

Data come from a survey of Florida nursing homes. Several hypotheses examine the extent to which organizational characteristics, environmental scanning, internal and external slack, and entrepreneurial orientation impact the degree of investment in a portfolio of services to community based clients. Data were analyzed via ordinary least squares regression.

Results indicate a positive relationship between platform investments and customer preferences and nursing home innovativeness. Risk‐taking behavior and internal slack received mixed support.

The study did not include measures of economic performance; therefore, it is unclear if differences in market strategies yield better financial outcomes for the nursing homes. The study was set in the nursing home industry that is a highly regulated service industry. It is possible that specific attributes of this industry impacted our results.

In deciding whether an options approach to managing customer value is appropriate for any individual service firms, managers should consider that a firm's strategic posture and the availability of slack resources.

There has been relatively little research in the management literature that examines how firms in a service context employ strategies and tactics consistent with options theory to reduce uncertainty. This lack of research is problematic given that service firms compromise an increasing percentage of the GDP of many developed countries.

Real options available to developers and leading to an active and dynamic development of real estate assets are numerous. The purpose of the article is twofold. First, a conceptual framework is proposed as a practical aid for recognizing and understanding some frequently recurring combinations of options (such as deferral and expansion options). Based on the definition and classification of real options available in real estate markets, a comprehensive valuation tool for quantifying the value of those options embedded in a real estate development project is thus developed using a portfolio view.

Based on standard option pricing techniques, the proposed conceptual methodology is validated by applying it to an actual case of an investment for the construction of a new, multi‐purpose building in the semi‐central zone of the urban area of Rome (Italy).

Based on a static land value of €34.7 million, a waiting mode (deferral option) at an early stage of developing a property accounts for 16 percent of the expanded land value of the project, with 8 percent of such value being contributed by the expansion option. A real options valuation of the options portfolio available to a real estate developer enables increasing the project value by 31.1 percent as opposed to a traditional DCF analysis. In line with financial options theory, values of real options increase as volatility rises.

The case‐based analysis highlights that: flexibility in real estate development may create additional value enabling real estate developers or funds to react to market trends as new information arrives and uncertainty on fundamental factors (e.g. property prices) unfolds; the extra value added by managerial flexibility is neglected by DCF/NPV techniques; contrary to the common criticism on its lack of rigor, option valuation theory is suitable for appraising real estate assets; a portfolio approach is crucial when multiple real options exist.

Active management of real estate investments in response to changing property market and technology conditions confers operating flexibility and strategic value to appraisal of development projects beyond what is traditionally captured by a DCF model. An options approach to valuing and managing real estate development may change the developer's perspective altogether. Based on the combination of an original classification and a portfolio view of options existing in real estate markets, a real options framework for assessing the value of strategic flexibility incorporated in a greenfield development project (also accounting for potential option interactions) is designed.

The purpose of this study is first to evaluate whether real options analysis (ROA) is suitable for valuing green building certificates, and second to calculate the real option value of a green certificate in a typical office building setting. Green buildings are demonstrated as one of the most profitable climate mitigation actions. However, no consensus exists among industry professionals about how green buildings and specifically green building certificates should be valued.

The research design of the study involves a theoretical part and an empirical part. In the theoretical part, option characteristics of green building certificates are identified and a contemporary real option valuation method is proposed for application. In the empirical part, the application is demonstrated in an embedded multiple case study design. Two different building cases (with and without green certificate) with eight independent cash flow valuations by eight industry professionals are used as data set for eight valuation case studies and analyses. Additionally, cross-case analysis is executed for strengthening the analysis.

The paper finds that green certificates have several characteristics similar to real options and supports the idea of using ROA in valuing a green certificate. The paper also explains how option pricing theory and discounted cash flow (DCF) method deal with uncertainty and what shortcomings of DCF could be overcome by ROA. The results show that a mean real option value of 985,000 (or 8.8 per cent premium to the mean property value) was found for a Leadership in Energy and Environmental Design Platinum certificate in the Finnish property market. The main finding of the paper suggests that the contemporary real option valuation methods are appropriate to assess the monetary value and the uncertainty of a green building certificate.

This is the first study to argue that option-pricing theory can be used for valuing green building certificates. The identification of the option characteristics of green building certificates and demonstration of the ROA in an empirical case makes questions whether the current mainstream investment analysis approaches are the most suitable methods for valuing green building certificates.

Public-private partnerships (PPPs) require the analysis and allocation of a broad spectrum of risks which are considered more complex than in traditional construction contracts. Traditional risk management techniques tend to ignore the manager's ability to recognize and exploit opportunities, which arise as uncertainties are resolved over time and which could potentially increase the project's value. Therefore it is necessary that the risk management process takes account of the managerial flexibility (e.g. real options). The objective of this paper is to explore the possibilities and rationale for implementing real options strategies in the risk management process.

The approach is based on a literature analysis aimed at identifying key risks and related mitigation strategies and on real option theory in order to model these strategies as managerial flexibilities that naturally exist or are built “artificially” in contractual conditions and clauses, guarantees, etc.

The paper develops an option-based risk management framework that associates to each risk the related mitigation strategies, which are expressed in terms of real options. The latter is expressed over the project phases conditioned to the natural evolution of risks over time.

This paper proposes a new “dynamic” risk management approach for PPP projects based on real options that improves the traditional risk management techniques by supporting the decision makers in finding a cost-effective combination of real options (or forms of flexibility) to embed in a PPP investment in order to optimally control risk and maximize investment value.