Why you need real options

Things were simple when I worked in the games industry. If the company’s owner liked an idea, he invested in it. One guy’s gut feel drove our entire investment strategy.

Back then, in the 90’s, a typical console game cost maybe £1m to develop. Our boss could afford to invest in several at once, giving himself a pretty decent chance that at least one of them would make money. And he only needed one or two successes to pay for a long tail of flops.

Nowadays, a high profile console game costs upwards of £20m to develop. Even large companies can only afford to carry a small number of failures of that size. Gut feel just doesn’t cut it any more.