Real Options Are Everywhere

If you haven't realized from our textbook discussion, real options are everywhere. In fact, a classic episode of Seinfeld discusses a real option, although the episode never mentions this as a real option. An interesting question about real options is exactly how to value them. In a recent paper, the great Avinash Dixit, a Princeton economist, takes a mathematical approach to this spongy topic. While we respect Dr. Dixit, we should also point out the importance of assumptions in any mathematical model. In his model, Dr. Dixit assumes Elaine has an infinite life. We would argue that the life of the model should be limited to the shelf-life of the sponge, not Elaine's life, since they are worthless after the expiration date and do have a finite life. http://www.princeton.edu/~dixitak/home/Elaine-Final-Web.pdf