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| Real Options Valuation× | Risk-Neutral Valuation× | |
|---|---|---|
| Field≠ | Economics | Quantitative Finance |
| Family≠ | Process / pipeline | Regression model |
| Year of origin≠ | 1994 | 1979 |
| Originator≠ | Stewart Myers (term); Dixit & Pindyck, Trigeorgis (theory) | John Harrison and David Kreps |
| Type≠ | Valuation of managerial flexibility under uncertainty | Fundamental Principle |
| Seminal source≠ | Dixit, A. K., & Pindyck, R. S. (1994). Investment Under Uncertainty. Princeton University Press. ISBN: 9780691034102 | Harrison, J. M., & Kreps, D. M. (1979). Martingales and arbitrage in multiperiod securities markets. Journal of Economic Theory, 20(3), 381-408. DOI ↗ |
| Aliases≠ | Real Options Analysis, ROV, Real Option Pricing, Investment Under Uncertainty | Risk-Neutral Measure, Q-Measure |
| Related≠ | 3 | 4 |
| Summary≠ | Real options valuation applies the theory of financial options to real (physical, strategic) investment decisions, valuing the managerial flexibility to defer, expand, contract, switch, or abandon a project as uncertainty resolves over time. Where standard discounted-cash-flow analysis assumes a now-or-never commitment to a fixed plan, real options recognize that managers hold rights — not obligations — to act, and that this flexibility has value precisely because the future is uncertain. Using option-pricing and dynamic-programming methods, the approach values these embedded options and identifies the optimal timing and conditions for exercising them. | Risk-neutral valuation (1979) is the fundamental principle that derivative prices equal the expected payoff discounted at the risk-free rate, computed under a risk-neutral probability measure (Q-measure). This principle, formalized by Harrison and Kreps, eliminates the need to estimate risk premia and is the foundation of modern derivatives pricing. |
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