On the usability of real option valuation model types under different types of uncertainty

Collan, Mikael; Haahtela, Tero; Kyläheiko, Kalevi

doi:10.1504/ijbir.2016.077608

Cited by 21 publications

(8 citation statements)

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“…To date, real option theory has been widely applied worldwide to evaluate government guarantees and provide supports to mitigate the risks of PPP projects (Collan et al, 2016). Cruz and Marques (2013) addressed contract flexibility and its incorporation into PPP arrangements through a proposed double entry matrix.…”

Section: Real Option Theorymentioning

confidence: 99%

Value of Investors’ Escalation of Commitment in PPP Projects Using Real Option Thinking

Gao

Liu

2020

International Journal of Strategic Property Management

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Escalation of commitment (EOC) is a common behavior among investors who receive negative feedback (NF) in public-private partnership (PPP) projects, and this behavior typically leads to sizable losses. Recognizing this, investors set a mental threshold and track investments for escalation. Once losses reach the threshold, investors will terminate the escalation behavior, namely, they will transfer projects to governments to obtain compensation or residual asset value. This paper analyzes the maximum amount of NF that investors can sustain based on a belief-adjustment model, followed by the analysis of the greatest loss degree. Then, a threshold model for EOC is constructed using real option thinking. Different from the usual judgment criteria of the traditional option method, the threshold is less than zero in the EOC scenario. The results show that the threshold correlates with the initial generative cognition, the sunk cost level, the degree of the government guarantee and investors’ behavioral preferences as well as with total investment and return on investment. These findings serve as a reference for governments to de-escalate investors’ commitment in PPP projects.

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Section: Real Option Theorymentioning

confidence: 99%

Value of Investors’ Escalation of Commitment in PPP Projects Using Real Option Thinking

Gao

Liu

2020

International Journal of Strategic Property Management

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“…The Real Options Term, coined by Myers (1977) to express the options inserted in investment opportunities, such as suspending, postponing or abandoning the investment (Lambrecht, 2017;Collan et al, 2016) is presented as an investor right, but not the obligation, to make a decision about postponing, expanding, contracting or abandoning an investment at a certain cost (strike price) for a certain period of time (option lifetime) (Copeland & Antikarov, 2001).…”

Section: Introductionmentioning

confidence: 99%

The different characteristics of real options in contracts of wind power in Brazil

Delapedra-Silva

2021

Gest. Prod.

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This paper investigates the existence of uncertainties in different wind power commercialization contracts in Brazil and their correlation with the Real Options associated with unmitigated risks in the Back up Energy and New Energy contracts. From a documentary review of existing contracts from 2009 to 2018, it was found that the Real Options on New Energy contracts are more susceptible to market uncertainties related to energy price in the short-term market. The Real Options associated with risks not mitigated in Back up Energy contracts are more linked to uncertainties regarding the power generation efficiency and the project plant expansion capacity in order to generate the anticipation of its supply.

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“…Real option analysis has been used in many industries to support investment decision-making. Good examples include the mining [3] and the energy [4] industries, and there are a number of different types of approaches for real option valuation available [5,6]. While ROA is winning ground in some industries, and the number of academic contributions on real options are steadily growing, the approach has not been universally adopted in the industry [7,8].…”

Section: Introductionmentioning

confidence: 99%

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

Morreale

Mittone

et al. 2020

Sustainability

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Business sustainability and real options are closely connected, as real options are managerial flexibility that allows organizations to adapt to changes in their environment, thus making the organization more robust and economically sustainable. Studies in real options theory abound, yet there is still a lack of evidence on whether people make decisions consistently with the predictions made by real options models. We run a laboratory experiment to study the role of option value and the laboratory time required to resolve uncertainty in individuals' decision to price and adopt an option to wait. Specifically, we compare decision makers' choices in two investment scenarios: One with a short time to maturity (implying a low option value), and another with a longer time to maturity (implying a high option value). In the lab, both scenarios are implemented with the waiting time of twenty and sixty minutes. Our results show that decision makers deviate from the theoretical predictions, recognizing the benefit of waiting, when the value of the option is higher, or when the waiting time is shorter. Our study does not only bring more insights into real options adoption at the individual level, but also emphasizes the great potential of behavioral and experimental approach to bridge the gap between theory and practice in the real options literature.

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On the usability of real option valuation model types under different types of uncertainty

Cited by 21 publications

References 0 publications

Value of Investors’ Escalation of Commitment in PPP Projects Using Real Option Thinking

Value of Investors’ Escalation of Commitment in PPP Projects Using Real Option Thinking

The different characteristics of real options in contracts of wind power in Brazil

To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice

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