New Approaches to Valuation

In recent decades, economists have developed much more sophisticated models for the value of assets. Much of this development has been in the sub-field of finance and investment, and has been focused on publicly traded assets such as stocks, bonds, and derivative securities. These models explicitly incorporate risk, and in some cases specifically include management policies.

The most developed of this new approach are "option value" methods, in which the risk of certain events is explicitly included in the value calculation. These methods have been widely used for financial assets, and more narrowly in business valuation. Another method, known as dynamic programming, has been largely confined to academic settings. We present both these methods in "Dynamic Programming and Real Options Methods" on page 259.

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