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Real Options: New Phenomenon In Capital Budgeting

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  • Lect. Katarína Belanová Ph. D

    (University of Economics Faculty of National Economy Bratislava, Slovakia)

Abstract

Dealing with uncertainty of the economic environment on the decision to invest is not new. During the last three decades, a new strand of theory, Real options approach to investment, linking uncertainty and investments, has emerged. This theory is based on the simultaneous existence of three phenomena: uncertainty, irreversibility of investment and some freedom of choice on the timing of investment. Their interaction may generate an opportunity cost equivalent to the exercise of an option. As the article reveals, it adds an important dimension to the neoclassical theory of investment, while this one has not recognized the important qualitative and quantitative implications of this interaction. Moreover, it also explains some of its failures.

Suggested Citation

  • Lect. Katarína Belanová Ph. D, 2014. "Real Options: New Phenomenon In Capital Budgeting," Revista Tinerilor Economisti (The Young Economists Journal), University of Craiova, Faculty of Economics and Business Administration, vol. 1(22), pages 7-14, APRIL.
  • Handle: RePEc:aio:rteyej:v:1:y:2014:i:22:p:7-14
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    Keywords

    investment; uncertainty; risk; real option; irreversibility;

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing

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