A real options approach to measuring freedom in Sen's capabilities approach

Sustainability has gained increasing prominence in research literature, with environmental and social issues becoming more important in economic issues. One of the normative approaches to addressing sustainability issues has been applying Sen's capabilities approach. One of the advantages of Sen's capabilities approach is that it is able to take into account a wider range of issues in decision making compared to alternative methods, such as the ethical importance of freedom. A key problem in operationalising Sen's capabilities approach is providing a quantitative framework for measuring the freedom in decisions. In this paper we propose a method for operationalising Sen's capabilities approach by using the real options analysis as a framework to quantifying the freedom in decisions. The real options analysis is a well-established method of modelling economic decisions and using such an approach we propose quantifying the freedom in decisions in terms of the flexibility to exercise decision under the real options analysis. In this paper we show how real options analysis can be used to quantify and indicate the freedom of decisions in terms of Sen's capabilities approach. This paper provides a new framework for analysing decisions under Sen's capabilities approach and examples are provided.