Real options game models: A review

The combination of game theoretic analysis with the real options theory has been an active area of research in the last decade. Game theory has been focus of great attention in the academic field over the last decades and has influenced the development of a wide range of research areas from economics, biology and mathematics to political science. Real options theory, on the other hand, emerged in the eighties as a valuation technique, especially appropriate for investments with high uncertainty, and is today taught in most of the universities’ MBAs and Postgraduate courses. The attractiveness of the researchers for modeling competitive investment decisions by mixing concepts from both theories is because an investment decision in a competitive market can be seen, in its essence, as a “game” between firms, in the sense that in their decision firms implicitly take into account what they think it will be the other firms’ reactions to their own actions, and they know that their competitors think the same way. Thus, as one of the game theory’s goals is to provide an abstract framework for modeling situations involving interdependent choices, a merger between these two theories appears to be a logic step to do. In this paper, we discuss some of the most important details underlying the combined real options and game theory framework and review an extensive number of real options game models, summarizing its results, relating these results to the known empirical evidence, if any, and suggesting promising avenues for future research.