Abstract
Much research has investigated the application of real options to staged, new product development projects. Still, this literature has not addressed an important intuition�that bad projects may stay bad. A new product development project or a technology startup backed venture capital may include stage-to-stage dependencies. Its �state� at one gate may influence the transition probabilities at later gates. We develop a novel real option model that captures this intuition using dynamic programming and serial correlations. In a subsequent paper, we introduce partial derivatives similar to the Greeks that we named �control maps�. These control maps will assist the firm�s management to assess the financial impact of resource reallocations to project success factors. Such reallocations have the intent of turning bad projects into good ones. Thus, the proposed framework enables management to synchronize its management decision with financial ones.
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