Technology search investments: evolutionary,option reasoning,and option pricing approaches

How do firms allocate limited search resources among substituting technologies with uncertain prospects? This paper contrasts three different approaches. The first follows evolutionary theorists' portrayals of decision‐making processes under bounded rationality. The second approach—real option reasoning—fosters flexibility by investing in more than one technology and postponing the decision to specialize. Following the third approach—real option pricing—firms base their search investments on forward‐looking calculations of technology option prices. We lay out the contrasting theoretical assumptions behind each of these three approaches and construct a simulation model to compare their implications. Copyright © 2004 John Wiley & Sons, Ltd.