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Harness the power of real options
Real options theory is based on the Nobel Prize??winning work on financial options, and has captured the interest of executives, managers, and investors who need to understand the future profitability of an asset. Originally developed to value technology initiatives and companies, the method is now being applied broadly across various businesses and industries. The Real Options Solution offers comprehensive coverage of the real options approach with a five?step framework and examples for applying the author′s unique total value model based on real options analysis. This approach will help executives and investors minimize the risk of committing to new ventures and delivers a framework flexible enough to apply to business initiatives in all types of companies.

Harness the power of real options
Real options theory is based on the Nobel Prize--winning work on financial options, and has captured the interest of executives, managers, and investors who need to understand the future profitability of an asset. Originally developed to value technology initiatives and companies, the method is now being applied broadly across various businesses and industries. The Real Options Solution offers comprehensive coverage of the real options approach with a five-step framework and examples for applying the author's unique total value model based on real options analysis. This approach will help executives and investors minimize the risk of committing to new ventures and delivers a framework flexible enough to apply to business initiatives in all types of companies.

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CONTENTS
1 Introduction = 1
  From Knowledge to Value = 2
  Columbus's Business Plan = 4
  Risks in the Plan = 6
Part One A New Perspective on Value
  2 The Crisis in Valuation = 11
    The Nature of the Crisis in Brief = 12
    The First Crisis in Valuation = 12
    The Intellectual Capital "Solution" = 14
    Exploiting Strategic Capital : The Japanese Attack on the U.S. Auto Market = 18
    The Second Crisis in Valuation = 20
    The Three Levels of Valuation : Book, Economic, and Total = 22
    The Missing Piece : Strategic Capital = 22
    Comparing the Three Approaches to Valuation = 25
    When Market Value Does Not Follow Economic Value = 28
    Transaction Accounting : Marking Economic and Strategic Capital to Market = 30
    The LBO Option = 31
    Strategic Buyers versus Financial Buyers = 32
    Investment Styles : Growth versus Value = 34
    Why Total Value Is Not Market Value = 37
    The Twin Causes of Invisibility : Darkness and Fog = 39
    Genentech : A Dress Rehearsal for the New Economy = 41
    The Agracetus Case = 44
  3 Economic Value : The DCF "Gold Standard" and Its Limitations = 51
    Economic Value = 52
    The Relationship of Economic Profit to Economic Value = 52
    Linking Growth and Value : The Peggy Sue Scenario, Part Ⅰ = 54
    The Value Mind-Set = 60
    Value-Creating Investment Strategies = 63
    The Cost of Capital and Discounted Cash Flow = 64
    The Magic of Growth Multipliers = 67
    Defining Economic Assets = 69
    Value Processes = 72
    The Issue of Time Horizons = 73
  4 The Total Value Model = 75
    Inside the Model = 77
    Are Idle Assets Options? = 87
    Six Steps to Total Value = 90
    What We Can Learn from Peggy Sue = 96
    Total Value and the Real Investor = 99
    Real Options Apply to "Real Life" = 102
  5 Enter the Options Dragon = 103
    The Revenge of the Quants = 104
    Options, Time, and Information = 106
    Options on Common Stock = 107
    Random Walk Theory, the Normal Distribution, and Black-Scholes = 108
    The Behavior of Options = 111
    Incentive Options = 113
    Objections to the Random Walk Approach = 113
    Options in Ordinary Business = 115
    Real Options = 117
    Drilling for Oil : Combining Unique Risk and Market Risk = 120
    The Abandonment Option = 122
    The Mark I MicroComputer Case and the Option to Make Follow-On Investments = 124
    The Downside of Turbocharged Valuations = 127
    The Amazon Case = 129
    The eToys Case = 132
    Competitive Power = 133
    Changing Volatility = 135
  6 Why Plans Are Options = 137
    Plans as Costs = 138
    Plans as Assets = 139
    Plans : The Spectrum of Value = 141
    Plans as Forecasts : No Value = 143
    Plans for Capital Investments : Moderate Value = 145
    Plans for New-to-the-World Products and Services : High Value = 147
    The Value of Management Flexibility = 152
    Plans versus Dreams : The Importance of Position = 155
    Exploiting Position = 158
    Real Options and Fatal Flaws = 160
    Real Options and Mergers and Acquisitions = 162
    Summary = 163
Part Two The Source of Wealth : Mastering Risk, Innovation, and the Law of Diminishing Returns
  7 Diminishing Returns : The Dusty Road to Devolution = 167
    Down on the Farm : Diminishing Returns in a Primitive Operating System = 168
    Devolution Does Happen : Ancient Mexico, Ancient Zimbabwe, and Modern Russia = 170
    Devolution in Business Organizations : Automobiles = 174
    Diminishing Returns from Technology = 176
    Diminishing Returns from Plunder = 179
    Plundering Strategic Capital = 182
    Devolution and the Leveraged Buyout = 184
    Increasing Returns : The Law Challenged = 187
  8 Five Millennia of Value Destruction = 191
    Historical Growth Rates = 192
    Why Wealth Creation Was Not Sustained = 195
    Civilization's Missing Algorithm = 211
  9 Does Risk Deserve Its Bad Name? = 215
    Unique Risk and Market Risk = 216
    Risk and Volatility = 217
    Risk and Time = 219
    The Oil Well Case Revisited = 221
    Is There a Premium for Assuming Risk? = 222
    The Underlying Nature of Technical Risk = 224
    Financial Risk = 228
    Operating Risk = 229
    Legal Risk = 231
    Now for the Upsides = 233
    Risk and Utility = 234
    Why the Rich Get Richer = 236
    Risk and Change = 237
  10 Taming the Risk Bogeyman = 239
    A Little History = 240
    The Mathematics of Risk Management = 242
    Insurance = 243
    Hedging = 245
    Exploiting the Option to Abandon = 246
    Cooper's Rules for Managing Development = 249
    Squeezing Value from the Option to Abandon R&D Projects = 251
    Building in Market Risk = 254
    A Real Options Approach to Project Control = 255
    Risk-Weighted Hurdle Rates : A Dangerous Fallacy = 257
    Diversification in the R&D World = 259
    Venture Capital and Diversification = 264
    A Value Proposition for Early-Stage R&D = 265
    Summary = 267
  11 The Enigma of Intellectual Capital = 269
    The Intellectual Capital Landscape = 270
    Education = 271
    Experience = 274
    Real Options and the Value of Business Leadership = 277
    Human and Intellectual Capital = 278
    Distinguishing Value Processes from Transformational Processes = 279
    Productivity = 280
    Creativity = 281
    Who Owns Human Capital? = 284
    Classic Intellectual Property = 288
    How Value Is Created through Intellectual Capital = 308
    Valuation and R&D Accounting = 310
    Summary = 315
  12 Innovation : The Fountain of Prosperity = 317
    Innovation's Impact = 319
    Sources of Innovation = 320
    The Technology S-Curve = 322
    Continuous Innovation = 324
    Discontinuous Innovation = 325
    Fostering Discontinuous Innovation = 327
    Salvaging Value from Failed Innovation = 330
    Not All Innovation Is Technological = 331
    The Foundations of Innovation = 333
    The Outlook for Innovation = 337
    A Prescription for Sustaining Innovation = 339
  13 Can Government Manage Risk and Value? = 341
    Security and Risk Reduction = 343
    Education = 344
    Infrastructure = 348
    Public Health = 351
    Intellectual Capital = 359
    Transfer Payments = 363
    Taxes = 365
    U.S. Tax Policy Favors High-Risk Investing = 368
    Summary = 369
Epilogue = 371
  Will There Be Investment Opportunities? = 373
  Some Concerns = 374
Endnotes = 383
Index = 397