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A Comparison between Real Options and Traditional Analysis in Layman's Terms

This paper provides a contrast between traditional valuation methods and the new generation of strategic decision analytics, namely real options analysis (with Monte Carlo simulation, stochastic forecasting, and optimization). In addition, it briefly illuminates the advantages as well as the pitfalls of using each methodology. It should be clear to the reader that the new analytics described here do not completely replace the traditional approaches. Rather, the new analytics complement and build upon the traditional approaches – in fact, one of the precursors to performing real options and simulation is the development of a traditional model. Thus, do not ignore or discard what is tried and true – traditional approaches are not incorrect, they are simply incomplete when modeled under actual business conditions of uncertainty and risk – but complement it with more advanced analytics to obtain a much clearer view of the business reality.