Examination of the behavior of R&D returns using a power law

This paper provides an improved model, based on historical data, that describes the returns on assets that result from R&D efforts to assist managers of public and private R&D activities. Such a model may lead to better decision support tools to monetize the value that may be extracted from R&D, which is otherwise often undervalued. Real option pricing models are used to gauge appropriate funding levels for assets such as R&D projects that contain large time-dependent uncertainties. However, this study finds that assuming the Gaussian distribution describes fluctuations in value is not appropriate for assets whose value is derived from R&D activities. This conclusion is based on a study of 43 military R&D projects and 100 technology-intensive small firms. A power law, such as the Cauchy distribution, is shown to be more accurate in describing fluctuations in returns from R&D investments.