erisk interview vince may inteersted following interview appeared erisk com last friday rick buy comments real options taken context yann bonduelle leads 25 person team london applies decision analytics real options theory dilemmas ranging valuing biotechnology product deciding whether kill internet financial services business talks rob jameson whether theoretical approach risky decision making really helps businesses day day balancing risk reward yann holds ph degree engineering economic systems department stanford university studied apply engineering decision design analysis wider economic social business issues worked consultant applying decision analysis methodologies problems included consumer decision making innovative products electrical vehicles joining team 1998 partner written widely application real options particularly fields life sciences technology e business special interest relationship risk assessment validation risk data financial valuation would sum approach business decision analytics projects set help businesses face massive uncertainties kind decision analysis helps people explore problems redesign decision making process increase chance making right choices example imagine biotechnology company decide whether put sale enter strategic relationship continue go alone options lead value enhancing value destroying scenarios work client firstly understand challenge assumptions associated likely business development scenarios secondly help identify decisions would help protect increase value technology company quantifying technical regulatory commercial risks sometimes challenge technology intensive fields however found managers often scientists quite willing describe main sources risk assess probability risky event may may occur kind risky decision making relate real options valuation say value asset decide might use means form opinion value asset must explore important decisions likely face significant impact value asset decision analysis helps define business problem uncover stream inter related choices effect real options example company trying decide whether invest risky project option pull plug investment early stage pilot project gives poor showing real option reduces riskiness increases potential value original business plan real options decision analysis really close one another believe real options valuations find decision analysis useful mean often decision analysis help managers identify key risks strategic decision attach weights show clearly interact many companies risk discovery valuable part exercise real options theory criticised recently well realistic practical approach valuation important hold unrealistic hopes real options approach valuation exciting methodology also sometimes reasonable way tackling practical problem example firm sells asset firm might make independent valuation asset legal corporate governance reasons many businesses today assets simply valued traditional ways difficult link cashflows cashflows might exist business novel might hidden respects real options analysis much closer reality traditional valuation exactly classic way valuing future business base calculation single discounted cashflow projected activity really take account way scenarios change fact managers react situations unfold mentioned earlier option kill project business early point upside pilot project yields exciting results might allow invest quickly reach revenue generating position much shorter time original business plan allows value future business really need look cashflows might arise number scenarios realistic project gets green light bet managers taking kind decision ground time challenging part mapping decision analysis tree modelling links variables decision tree something particular strengths also tricky know worthwhile add detail better draw back recent erisk interview rick buy chief risk officer enron said two years enron experimented real options concept found limited zero use slight air cynicism real options businesses today strange enron would profess attitude years ago widely reported used real option valuation support profitable purchase decision apparently bought cheaply older generators us generated electricity high cost knew could mothball year switch electricity prices sufficiently high nevertheless customer point view might much hype methodology one problem application real options technology perhaps many people trying tweak reality conform perfect model better aim something pragmatic clearly improves decisions time one pharmaceutical company worked recently worked together improve valuation analyses moving single discounted cash flow methodology one took account rather small set business scenarios would shocked academics consultants undeniable improvement original approach think financial institutions picking field applied energy industry 15 years might something relative stability banking world recently relatively high margins banking lines enjoyed also industries energy pharmaceuticals tend people engineering science background dynamic modelling decisions based methodologies originally dreamed help engineers design electrical electronic systems approach quite distinct black scholes options analyses banking world familiar black scholes approach difficult apply real options context everything depends assumptions put black scholes model real options approach hand sense way modelling assumptions explicitly banks adopting thinking particularly terms using decision analysis pinpoint risks identify value enhancing decisions using real options methodologies sort wheat chaff speculative investments mean internet investments recently worked major dutch bank arrived late internet game made considerable number investments even b 2 b business models questions marks hanging many b 2 c businesses already water wanted work investments might contain real value situation case ranking priorities helping bank make sense could turn decision making chaos rather sophisticated valuation case whether internet investment killed problem whether continued funding take priority budget demands major upgrades existing businesses practical questions answered somehow areas financial institutions seem accessible approach yes example think help work value associated various approaches marketing new bank business line moment many banks chasing high net worth individuals always clear kind individual particular bank decide pursue bank might regional industry advantage already one particular area example music business people churn rate associated kind customer profitability associated customer segment time cost benefits advantages bank sector outweigh disadvantages weighing kind complex problem one thing leads depends another decision real options analysis good way rigorously backtesting validating real options valuations honesty really problem time option exercised many variables surrounding changed difficult compare original analysis things turn however value analysis comes final number value asset x also providing thorough process outsider point view understanding sources value short bit clearer thinking real options important rarely cited communications shareholders equity analysts battle still convince companies use real option valuations significant part internal analysis even major companies oil gas pharmaceutical sectors ideas taken root internally seems lot reluctance use external communication working analysts understand better need move things next step riskiness business terms major strategic dilemmas faces relate share value capital structure big question related work colleagues optimal debt equity capital structure gearing corporation turn arises likely revenue cost volatilities business volatile business less gearing sustain higher cost capital work touches sense exercising many specific real options allow firm change nature thus also risk profile one classic example pharmaceutical industry host different kinds companies service industry big pharma companies smaller biotechnology startups run mill contract research organisations contract research organisation often operating within competitive environment relatively risks invest drug development also thin margins fact companies used skills knowledge developed become much substantial profitable healthcare companies various kinds example company exercising real options lie within skills assets transform identity rob jameson erisk