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A Fuzzy expert system for solving ReaL-Option decision processes

Author

Listed:
  • Magni, C. A.
  • Mastroleo G.
  • Facchinetti, G.

    (University of Modena and Reggio Emilia)

Abstract

This paper presents a new approach to real options. The current options-based models have provided new insights into capital-budgeting decisions. Unfortunately they are not widely used by corporate managers and practitioners as they are formally complex, rather difficult to understand and rest on strong implicit assumptions that considerably limit their scope of application. We propose a possible alternative by using a fuzzy expert system, on the basis of Mastroleo, Facchinetti and Magni (2001). We draw up a decision tree with multiple uncertain variables affecting the value of an investment opportunity, consisting of a defer option, a growth option, an abandonment option. Some simulations are conducted to test the economic soundness of the model as well as its consistency with the current models in the literature. A rather refined study can be accomplished by showing how inputs and outputs of the model interrelate one another.

Suggested Citation

  • Magni, C. A. & Mastroleo G. & Facchinetti, G., 2001. "A Fuzzy expert system for solving ReaL-Option decision processes," Fuzzy Economic Review, International Association for Fuzzy-set Management and Economy (SIGEF), vol. 0(2), pages 51-73, November.
    • Handle: RePEc:fzy:fuzeco:v:vi:y:2001:i:2:p:51-73
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    Cited by:

    1. Malagoli, Stefano & Mastroleo, Giovanni & Magni, Carlo Alberto, 2005. "The use of fuzzy logic and expert systems for rating and pricing firms: a new perspective on valuation," MPRA Paper 11958, University Library of Munich, Germany.
    2. Carlo Alberto Magni & Stefano Malagoli & Giovanni Mastroleo, 2006. "An Alternative Approach To Firms' Evaluation: Expert Systems And Fuzzy Logic," International Journal of Information Technology & Decision Making (IJITDM), World Scientific Publishing Co. Pte. Ltd., vol. 5(01), pages 195-225.
    3. Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.
    4. Magni, Carlo Alberto, 2004. "Rating and ranking firms with fuzzy expert systems: the case of Camuzzi," MPRA Paper 5889, University Library of Munich, Germany.
    5. Kraemer, Christian & Madlener, Reinhard, 2009. "Using Fuzzy Real Options Valuation for Assessing Investments in NGCC and CCS Energy Conversion Technology," FCN Working Papers 3/2009, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN).

    More about this item

    Keywords

    Real options; strategic investments; sensitivity analysis; fuzzy expert system;
    All these keywords.

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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