Real Options: Other industries

As we have heard from Claire in Episode 1 of the movie QUESTIONS! developing new medicinal products is a risky and expensive business. The same is true for the discovery and development of other medical interventions such as novel medical devices or medical nutritional products. All these interventions require a huge upfront investment while there is no guarantee that there will be a return on investment. Other industries such as oil & gas face the same challenge. The discovery and development of a new oil field take several years (see the figure below), the costs of exploring different potential fields are high and the price of oil per barrel in the future (and thus future revenues) is hard to predict. Still investment decisions have to be made given the inherent uncertainties.