What the Academics Say
What Our Readers Say
What Reviewers Say
Full review of Alex Triantis
What Jeff Skilling, former CEO of Enron says

What the Academics Say

"This book provides and excellent introduction to the real options way of thinking."
Alexander Triantis, University of Maryland, in Risk Magazine, September 1999. (The full review)

"Real Options is an exciting, accessible introduction to one of the most useful innovations in modern finance. Filled with lively examples from various industries, the book reveals the power of real options in business planning."
David Luenberger, Professor of Engineering-Economic Systems and Operations Research, Stanford University, and author of Investment Science.

"This new book by Martha Amram and Nalin Kullatilaka provides a much-needed treatment of real options theory aimed at the practitioner. It is comprehensive, highly readable, and replete with useful examples. Every corporate finance practitioner should have a copy of Real Options on hand."
Robert Pindyck, Mistubishi Bank Professor of Applied Economics, MIT Sloan School of Management and coauthor of Investment Under Uncertainty

"Many long-term investments (e.g., plant or R&D) generate contingencies and real options. The term "real options" differentiates these options from financial options, which are the right to buy or sell securities. For example, R&D expense cannot produce a positive net cash flow but does create options to make additional investments. Traditional discounted cash flow methods (NPV and IRR) do not accurately value investments with contingencies and options, whereas a real optoins approach to capital budgeting incorporates these alternatives. Many corporate managers do not use a real option analysis because introductions to the approach have focused on the technical aspects of modeling and no the thought process. Amram and Kulatilaka, consultants and educators with specialiations in real options, have written a clear, concise explanation of the process of applying real options. They describe why risk increases the value of a real option since it widens the range of potential outcomes. While a real options approach may be intuitive for technology firms, the authors illustrate its application to valuing startup firms, vacant land, oil exploration, and licensing. This book should be exceedingly useful for MBA and executive management programs."
H. Mayo, the College of New Jersey, in Choice

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What Our Readers Say

"This is the first Real Options book that targets the general management audience and, subsequently, is not bursting at the seams with daunting calculations and formulas that typically turn-off even the most enthusiastic readers. It recognizes that there is just as much power in developing a 'real options way of thinking' as there is in understanding the mechanics of the economic theory. Having worked for several years in product development where traditional financial treatments like NPV are extremely limited, I cannot emphasize enough the power of these frameworks. I would highly recommend this book to people who are similarly frustrated by their current management tools, which fail to capture the nuances of the strategic decisions they face. Through its structure and frequent case examples, the book makes real options much more approachable. This increases the likelihood that decisions will actually be influenced and enhanced even in the face of significant uncertainty."

"At last, a book about options with fewer equations than case studies of real applications. Too many other books on this vital topic concentrate on the theory, which is very mathematical and arcane. This fails to reach the audience who most need Option thinking: the general manager who has to make strategic decisions in an uncertain environment. This book addresses the general manager through case studies shorn of obscure and unnecessary detail."

"I face difficult decisions every day -- the underlying information on which to base any of my decisions is often incomplete or uncertain. Some such decisions, e.g. structuring the terms of a licensing agreement, often draw upon industry-standard metrics of evaluation... but in reality both sides are looking into a crystal ball, weighing our risks against the possibility of success. It is an uncomfortable state; blunders can be costly -- as can be lost opportunities. Amram and Kulatilaka have put together a masterful roadmap for evaluating uncertainty -- one which can even clarify "gut-feelings". "Real Options: Managing Strategic Investment in an Uncertain World" was particularly easy to read because of the many examples provided. They wrote this as a handbook for decision-makers, the managers and licensing executives who up to their eyeballs in choices, negotiations, and deals -- its not just a textbook for economics graduate students. Interestingly, I found the Real Options strategies applied to decision-making outside the envelope of license negotiations. I use this strategy to value my investment of time and resources in a variety of projects where uncertainty often seems to be the overriding variable. Yes, risk and uncertainty are part of real life -- they sure can make your stomach hurt. Real Options can help you find your path and ease the stomach-pain of choosing. "

"I've almost completed your book now and I do really like it. So much in fact that I've adopted it in three more classes for this spring and summer. I've looked through your web site and like the way the book is offered, supported, framed... anyway, well done!"

"Your book, Real Options, was very helpful to me in understanding the application of the theory to several actual cases."

"It starts from a finance/investment perspective using the options work of Merton/Black/Scholes, but extends the notion to contingent decision-making in a more general sense. It is pithy and makes you think and work. I'm confident that by the time I finish it I will be eager to go back and understand parts of it in greater depth."

"I have read your book with big interest. Very positive that this is possible without being a math professional."

"I would like to commend both you and Nalin on a well-written and informative book- Real Options... I enjoyed your book and believe that the area of real options and framing is coming of age..."

"Thank you very much for a great book on a really interesting subject."

"I think the book is great."

"Well-written and very insightful!"

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What Reviewers Say

What [Real Options] does is apply modern options pricing theory to the value of options in trading assets. I think it's a brilliant book"
Hal Rosenbluth, Executive Reader of Inc. Magazine and CEO, Rosenbluth International, Philadelphia.

"Attention technology company CFOs and financial managers, this one is for you. Based on the path-breaking work of recent Nobel Prize-winners Fischer Black, Robert Merton and Myron Scholes concerning the pricing of financial option contracts, this book applies the theory to "real" investment decisions and creates a framework for decision making that goes far beyond the standard financial models. The authors argue that using real options valuation increases the value of a project significantly and helps managers concentrate capital on projects of strategic importance, even when the payoff is not immediate. While not for the average executive, this book is a useful guide for financial managers to evaluate all types of investment decisions, from R&D spending to competitive strategy to project portfolio to product design. It's a worthwhile overview of this important new financial tool."
Bruce Rayner, Electronic Business

"Readable. Makes key ideas easily accessible. A lot more like a book length Harvard Business Review article than the books by Trigeorgis and Dixit-Pindyck. The toughest equation was pu2 + (1-p)d2 - [pu + (1-p)d]2 = s2 - not that there's anything wrong with that. I'm glad I've got it on my bookshelf."
Dr. Risk

"Huge payoffs in business usually entail embracing lots of risk. That's the message of Real Options, by Martha Amram and Nalin Kulatilaka. The authors argue that standard models of evaluating strategic investments fail to consider the element of risk fully. "Uncertainty creates opportunities. Managers should welcome, not fear uncertainty," write Amram, a California-based consultant, and Kulatilaka, a Boston University finance professor, in describing the "real options approach." The book provides plenty of theoretical case studies, formulas, and charts that demonstrate how to shape business strategies using a system based on option-pricing.
Dan Ring, Amazon.com

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Full review of Alex Triantis

"Financial option traders are keenly aware that increased volatility leads to higher option values. In contrast, few corporate managers would welcome more uncertainty as a way to enhance firm value. They might, however, if they were able to recognise the "real options" embedded in their investment opportunities. The real options approach is a powerful new analysis technique that is well suited for strategic decision-making and valuation in uncertain and competitive business environments. By following this approach, firms can realise the full potential for their growth, flexibility, and exit options, and equity analysts can significantly improve the accuracy of their valuations, in particular for high-growth companies.

This book provides and excellent introduction to this "real options way of thinking." The authors eschew a highly mathematical approach, and instead present the concepts behind real options analysis in simple, intuitive terms in order to appeal to a wider audience. Executives can learn to appreciate the options approach as a way to introduce the discipline of financial markets into their firm's decision-making process. Analysts who have been frustrated by the difficulty in valuing Internet and telecom companies will be excited by the promise of this new technique.

To move from a conventional approach to a real options approach, one must appreciate that a firm can delay and revise its investment decisions over time, contingent on future outcomes of key variables. The authors highlight the importance of properly framing the decision problem, including an identification of important sources of uncertainty and of relevant strategic decisions. They present a strong case that when making corporate strategic decisions, the application frame is more important than a precise estimation of each underlying uncertainty.

The authors are careful to distinguish between "market risks" and "private risks". For market risks (such as the price of a commodity or the level of interest rates), it is important to turn to financial markets to base estimated of volatilities and returns on objective measures, rather than one subjective beliefs. The discipline afforded by turning to the financial markets is one of the key messages of the book. However, the authors also recognise the limitations of not being able to construct perfectly correlated tracking portfolios, and frequently address the issue of tracking error in their book.

There are many other complexities that make corporate investments and valuation problems often significantly more complicated than simply applying financial option pricing theory. The value and optimal exercise of one firm's growth options may depend critically on the investment decisions of its competitors. Managers' compensation may not properly align their interests with those of shareholders, affecting the value of the firm's options. The value of a firm's real options may also depend on the firm's hedging policies. While the authors strive for simplicity in their presentation, they do touch on some of these complexities.

The most attractive feature of this book and the corporate web site www.real-options.com is a collection of 10 examples that show how the real options approach can be used in a wide range of industries. These cases are kept deliberately short and simple to illustrate clearly different insights and valuation issues that are raised earlier in the book. The examples include valuing a start-up, exploring for oil, developing a drug, investing in information technology infrastructure, valuing land, writing a license and valuing production flexibility. While the reader may be left wanting more detail about some of the applications that really hit home, these examples illustrate the power of using the real options approach in practice.

If there is any uncertainty in your mind regarding the potential benefit of employing a real options approach in your company, then you will probably find this book to be an inexpensive "learning option". At a minimum, reading this book will sharpen your intuition about corporate strategy, but it also has the potential for a huge upside reward if you haven't been initiated into the new "real options way of thinking."
Alexander Triantis, University of Maryland, in Risk Magazine, September 1999.

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What Jeff Skilling, former CEO of Enron says

"A very lucid and concise presentation of the applications of modern option pricing theory to the valuation of non-traded assets. This book's approach will change corporate decision making in areas such as strategic investment in fixed assets and the selection of R&D projects. The theoretical framework shows how a corporation can consistently evaluate and compare its alternatives, whether they be to invest in financial markets or in physical assets."
Jeffrey Skilling, former CEO, Enron Corporation

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