Abstract
This chapter focuses on the analytic solution of the continuous random controls. Much of the theory of real (investment) options captures the value of waiting to invest, and the flexibility to switch among modes of operation without explicit consideration of managerial actions to enhance value and acquire more information. Many industries with heavy research and development expenditures, exploration, experimentation, or clinical testing activities, and similar actions like marketing research and advertisement, face too many uncertainties in their capital-intensive investment process to ignore efforts for information acquisition. This chapter presents a model, which allows managers to estimate how much to spend in order to enhance the value of their investment opportunities. This value enhancement is pursued either directly through impact control-type actions or indirectly through pure learning (information acquisition) actions. Modeling management's decision process with contingent claims (real options) tools is required; neglecting such actions would provide erroneous results for both the investment value and the optimal investment timing decision.
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