Tepid adoption is observed despite the robust framework of real options. What are the reasons? What is the way out?

Real options approach in capital budgeting, touted as one of the path-breaking ideas in finance in the recent past, is in real trouble. If recent evidence is anything to go by, the tool is in the danger of going down in history as an innovation that sounded great in theory, but failed miserably in its practical applications.

Numerous surveys indicate that real options is fast losing ground among corporates. To quote a survey conducted by Mark Jeffrey, Assistant Professor of Technology at Kellogg School of Management and Sandeep Shah, a Research Associate at the same school, among Fortune 1000 Chief Information Officers (CIOs), only 19% of the CIOs are using real options in their IT investment decision-making. Also, a similar survey of 205 Fortune 1000 CFOs by Colorado State University Professor Patricia A Ryan, revealed that real options was trailing in a group of 13 capital-budgeting tools.

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