From theoretical real options models to pragmatic decision making: Required steps, opportunities and threats

Port capacity investments are large, irreversible and uncertain projects, involving different decision variables to be optimised. In order to optimise the timing and size of such projects, the literature has indicated that real options (RO) are better suited than the more traditional net present value (NPV) approach. The models are very theoretical and difficult to implement in practice. The objective of this paper is to extend the empirical RO literature in transportation and logistics by bringing continuous-time continuous-state RO models closer to practitioners. This is done by means of developing a blueprint for a practical software application through which port investment managers can easily calculate their optimal decisions. Additionally, the blueprint of this practical implementation allows for a better understanding of the continuous RO logic and way of working. As the discussion of the RO advantages shows, optimising the decision through continuous RO models, rather than applying NPV, can allow ports to realise a much better investment and generate a lot more value from port investment projects. Nevertheless, depending on the specific situation, practitioners might require supplementary assistance of econometricians or consultants to estimate the RO model input parameters. This paper also adds to the literature by quantifying these potential gains and costs.