Real Options Pricing and Organizations: The Contingent Risks of Extended Theoretical Domains

Abstract

As options models move from financial markets to corporate decision making, it is fitting to question the simple domain extension of option pricing theory by considering behavioral decision-making biases. We suggest, however, that, given the negative evolutionary consequences of ignoring optionlike investments, organizations invent heuristic rules to counter these biases. We propose the idea of a domain translation that shows how the basic insight of option pricing can be preserved through evolving complementary organizational rules.