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

Author

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  • Mikael Collan
  • Tero Haahtela
  • Kalevi Kyläheiko

Abstract

This paper discusses the usability of real option valuation model types under different types of uncertainty. Three types of uncertainty are presented (parametric, structural and procedural), followed by a presentation of six different real option valuation types that are variably suitable for different uncertainties that in turn characterise real world decision-making situations. A usability-based mapping of real option valuation models with each type of uncertainty is made and discussed. Implications concerning decision-making are direct: wrong model selection may lead to unreliable or wrong results and, consequently, poor and often expensive investment decisions.

Suggested Citation

  • Mikael Collan & Tero Haahtela & Kalevi Kyläheiko, 2016. "On the usability of real option valuation model types under different types of uncertainty," International Journal of Business Innovation and Research, Inderscience Enterprises Ltd, vol. 11(1), pages 18-37.
    • Handle: RePEc:ids:ijbire:v:11:y:2016:i:1:p:18-37
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    Citations

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    Cited by:

    1. Azzurra Morreale & Luigi Mittone & Thi-Thanh-Tam Vu & Mikael Collan, 2020. "To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice," Sustainability, MDPI, vol. 12(8), pages 1-19, April.
    2. Kozlova, Mariia, 2017. "Real option valuation in renewable energy literature: Research focus, trends and design," Renewable and Sustainable Energy Reviews, Elsevier, vol. 80(C), pages 180-196.

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