This paper undertakes a critique of experience curves from several angles. It considers the extent to which they can be regarded as an extension of learning curves, and concludes that the benefits from learning‐by‐doing at plant level are exhausted relatively early. It goes on to consider the evidence that there is a common slope to experience curves, their usefulness for forecasting prices, and possible reasons for a spurious correlation between accumulated output and average cost. It concludes by demonstrating the differences in strategic implications between the various possible economic factors which may underlie the experience curve. The conclusion is that experience curves are partly spurious, and of little practical value in forecasting or decision making.

We asked 82 experienced managers to value, in effect, a set of real options, by taking decisions on invented case studies. The classic Black Scholes model should set an upper bound for rational valuations of these options (since it assumes a risk neutral discount rate, which may be optimistic). The managers valued their options erratically, and generally optimistically, though their responses to changes in moneyness, volatility and maturity tended to be in the 'correct' directions. Oil industry managers over-valued least, relative to Black-Scholes, and Brewery managers most. Questionnaires explored managers' perceptions of the real option parameters encountered in their workplaces. Copyright Blackwell Publishers Ltd 1997.

When a mining company begins extraction from a finite resource, it does so in the presence of numerous uncertainties. One key uncertainty is the future price of the commodity being extracted, since a large enough drop in price can make a resource no longer cost-effective to extract, resulting in the mine being closed down. By specifying a stochastic price process, and implementing a financial-type model which leads to the use of partial differential equations, this paper creates the framework for efficiently capturing the probability of a mine remaining open throughout its planned extraction period, and derives the associated expected lifetime of extraction. An approximation to the abandonment price is described, which enables a closedform solution to be derived for the probability of operational success and expected lifetime. This approximation compares well with the full solution obtained using a semi-Lagrangian numerical technique.

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