Assessing Technology Projects Using Real Options Reasoning

Abstract

OVERVIEW:Real options reasoning is a logic for funding projects that maximizes learning and access to upside opportunities while containing costs and downside risk. Although it has considerable advantages over conventional approaches, the tools for using it remain scarce. This article describes a method for assessing uncertain projects that approximates option value through scoring a series of statements. Variables are the size and sustainability of potential revenue streams, speed or delay in market adoption, development costs, commercialization and market access costs, company strengths, likely competitive responses, dependence on standards, and the degree of uncertainty. Each variable is measured by asking questions that, in turn, can be used to assess the risks confronting a proposed project and to suggest remedies, even if they demand abandoning or reconfiguring the project. A major advantage of this approach is that it integrates both technological and strategic considerations.

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