Real option applications in megaproject planning: trends, relevance and research gaps. A literature review

Megaprojects are complex and contain multiple risks and uncertainties. The dominant ‘predict and control’ planning method mainly ignores risks and uncertainties, making megaprojects inflexible and vulnerable to unforeseen changes. Insights and methods from real options theory (ROT) in economics and finance have the potential to improve planning of megaprojects in three ways: (a) better management and assessment of risks and uncertainties, (b) a more transparent and explicit identification and communication of risks and uncertainties, and (c) a monetary valuation of flexibility. An in-depth literature review of 42 papers of real options applications to megaprojects serves as a benchmark to analyse if current real options literature meets these three expectations. Through this review, we identify the main trends, relevance and research gaps. While its theoretical relevance is illustrated, three main gaps impede real options’ practical relevance for megaprojects: the applications paint an incomplete picture of megaprojects; its mathematical complexity; and the lack of empirical evidence of real-life cases. Based on a plea for more interactive research between scholars and planning practitioners, we provide an agenda for further research as to how ROT can better meet its expectations and fulfill its potential for the planning of megaprojects.