Adaptive investment management: using a real options approach in transport planning

Real options provide a framework for planning and decision-making in the face of uncertainty. It is of most value where there is both uncertainty and flexibility to adapt a project to manage risks and respond to potential opportunities. It is an important supplement to traditional cost-benefit analysis in that it recognises the value of flexibility, and helps to avoid committing unnecessarily to large fixed costs which may be later regretted. Real options analysis is particularly useful in probing uncertainties and identifying potential strategies to manage those uncertainties – in some cases, even to exploit those uncertainties to deliver greater value. It also provides a rigorous framework for valuing projects, although in our view much of the value of real options lies in the former, i.e. thinking through the uncertainties, their implications and the way in which they are best managed. This report provides an explanation of real options analysis: the role of real options in planning and assessment frameworks, the insights it provides, and the different approaches that can be used to apply real options (with a particular emphasis on decision trees). The paper also provides an illustrative application to ports planning in NZ. Real options, as distinct from financial options, take the form of capabilities to defer or abandon, ramp up or scale down, to introduce staging, to switch technologies, or invest in additional information prior to commitment of a project - along with soundly based principles to guide decisions on whether and when to use these capabilities. Many of the concepts will be familiar to transport planners, although they may not have been termed “real options”.

Language

  • English

Media Info

  • Pagination: 43p

Subject/Index Terms

Filing Info

  • Accession Number: 01602489
  • Record Type: Publication
  • Source Agency: ARRB
  • Files: ITRD, ATRI
  • Created Date: Jun 21 2016 10:21AM