Class 4 - Valuation continued Flashcards
Explain the real options with the koller approach
with the koller approach, you take the max
all finance decision are based on uncertain facts
real options help to conceptualize and catch the uncertainty behind the decisions. if you base you decisions based on the possible failure and its incorporated in the decision youre ahead of the game
instead of using a crazy discount rate, why not using a normal discount rate a using a probability
using historical data for the premium and then taking a discount rate adjusted to the probabilities
its not the value of the real options but the concept of real options that matters
it should always be used to break up the decision into different stages. the more theres uncertainty, the more theres vol and the better it is because you can capture the value. the more vol, the more real options should be considered. not to litteraly assess the value but to make a decision
we can say that vc is a way of arbitraging private markets to public markets but 5 years down the line
real options helps to catch the uncertainty of the decisions. real options helps to conceptualize the uncertainty.
usually the valuable information comes with time
the best way to catch the value of the real option is to invest in stages
whats important is not the calculated value but its the feel that the option has value. the valuation has to do with 2 important variables : whether were way in the money or out the money and volatility
theres 2 approaches : black scholes’ binomial tree or decision tree
the decision tree is more realistic in terms of vc because it mimics the real life. in real life theres no market for options in vc and you can assess some type of probability with experience and knowledge
setting probability is a betetr understanding
you will not make a decision if the NPV is close to 0. its not the value of the real option but rather the magnitude : is it significant or not?
black scholes (binomial tree) : you have to use a specific vol number. pour un real option en vc ya pas de marché donc cest difficile de trouver la vol dun investissement comme on ferait sur le stock market. assessing the value of a real option based on black scholes model, you can make assumptions with a high vol and then calculate the value of the option and get a general sense of the value. however 100% vol is taken out of thin air, the model is not really applicable to real options
what are the contributors to the options’ value
Value of underlying asset Increase Exercise price Increase Volatility of underlying asset Increase Time to expiry Increase Risk-free rate Increase « Dividends » Increase
option value with the binomial tree
3 steps : event tree, decision tree, option value calculation
Explain the relevance of game theory
not used on a everyday basis but used in somekind of way
you have imperfect informaiton, you try to assess what the other player will do the decision is more important than the actual hand
theres a lot of competition in vc. theres always competition even if youre early stage and developpping a new tool. someone else in the world probably as had the same idea.
so theres the game of lauching a product or not taking into account whats gonna be the reaction of the market. its valuable to be able to think rationnaly what the other players will e
Modelling a decision that takes into account a “competitor’s” decision
the prisoners dilemme in itself is not valuable but thinking with it is
what are the asumptions of game theory
Players are rational
The possible choices of each player, and the utility of these choices are known
Players know the rules of the game (the sequence of decisions)
what are the benefits of the game theory
Representation (more) realistic of the reaction of competitors than a purely “probabilistic” model
Takes into account the interaction of interdependent decisions
Allows to model simultaneous decisions
Proposes a “solution” …
its a yes or no model
its not a probability of whats gonna happen, but rather what will the other player do
« All players must be maximizing their expected utility subject to some beliefs about other players’ decision »
what is the nash equilibrium
each player’s equilibrium strategy must be a best response to the equilibrium strategies of all other players (…)
Once the equilibrium strategies have been written down, no player could improve the payoff by changing to a different strategy.”
Can game theory have an impact on the strategic thinking of managers?
Game theory explains and conditions the way managers think…
Why is it said that game theory is not a “predictive” model of player behaviour?
Game theory implies that one assumes a given (rational) behavior of the part of the players…
what is metricks view on game theory and real options
justifying real option, game theory, models they are using. even if they are not litteraly using the tools, they are thinking in those way intuitively. the practive is evolving and practitionners are brought to use better model rather than using intuition
what metrick says is that these tools are a way of expressing how decision making is done. you arent born a venture capitalist out of the crib
game theory is normative in the sense that this is what should be done. you become more rationnal by using game theory. game theory is a tool, it can help but it does not erase all your sens of intuition. we try to take rationnal decision but we deal with a lot of irationnal behaviors
you never know 100% of the information when you make the decisions, theres always uncertainty when making decisions but the tools used is to manage the uncertainty. «intuitively i made the decision» but its not only intuition, it comes from experience and inner game theory etc.
game theory is normative because its what you should do but by using game thoery you reason more
were discribing the reality of vc but also how it should be
A deep understanding of finance can help someone make better venture capital and R&D investment decisions
yes it can, a better understanding leads to better decisions because if it does not help, whats the point
