| McKinsey Classics | July 2019 |
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| The real-options formula of Fischer Black and Myron Scholes may seem arcane to those of us who never got beyond math for poets. It’s easiest to understand the value of keeping options open in industries like oil extraction, where decisions to pursue or abandon any stage of investment depend on the previous one’s outcome. But every organization allocates resources among opportunities by deciding whether to invest now, invest later, or do nothing. All such management decisions create payoffs linked to future choices, so all of them entail options.
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| Don’t fear the math. Many investments are made by executives who aren’t deeply versed in estimating terminal values and the cost of capital for net-present-value calculations. Likewise, executives with just a basic knowledge of real-options models can use them successfully. To change your mind-set from “fear uncertainty and minimize investment” to “gain from uncertainty and maximize learning,” read “The real power of real options” (2000).
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| Did You Miss Our Previous McKinsey Classics? |
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| A sense of the meaning of work—and actions to reinforce that meaning—must come from top executives, who are in the best position to understand the higher purpose of what employees do. Read our 2012 classic “How leaders kill meaning at work.” |
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