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Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation

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Abstract

In this paper we seek to enhance the real options methodology developed by Copeland and Antikarov (2001) with traditional decision analysis tools to propose a discrete time method that allows the problem to be specified and solved with off the shelf decision analysis software. This method uses dynamic programming with an innovative algorithm to model the project’s stochastic process and real options with decision trees. The method is computationally intense, but simpler and more intuitive than traditional methods, thus allowing for greater flexibility in the modeling of the problem.

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Authors and Affiliations

  1. Department of Management Science and Information Systems, The University of Texas at Austin, McCombs School of Business, 1 University Station B6500, CBA 5.202, Austin, TX, 78712-1175

    Luiz E. Brandão & James S. Dyer

Authors
  1. Luiz E. Brandão
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  2. James S. Dyer
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Correspondence to Luiz E. Brandão.

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Brandão, L.E., Dyer, J.S. Decision Analysis and Real Options: A Discrete Time Approach to Real Option Valuation. Ann Oper Res 135, 21–39 (2005). https://doi.org/10.1007/s10479-005-6233-9

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  • DOI: https://doi.org/10.1007/s10479-005-6233-9

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