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Reducing Risk Through Real Options in Systems Design: The Case of Architecting a Maritime Domain Protection System

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  • Joost Buurman
  • Stephen Zhang
  • Vladan Babovic

Abstract

Complex engineering systems are usually designed to last for many years. Such systems will face many uncertainties in the future. Hence the design and deployment of these systems should not be based on a single scenario, but should incorporate flexibility. Flexibility can be incorporated in system architectures in the form of options that can be exercised in the future when new information is available. Incorporating flexibility comes, however, at a cost. To evaluate if this cost is worth the investment a real options analysis can be carried out. This approach is demonstrated through analysis of a case study of a previously developed static system‐of‐systems for maritime domain protection in the Straits of Malacca. This article presents a framework for dynamic strategic planning of engineering systems using real options analysis and demonstrates that flexibility adds considerable value over a static design. In addition to this it is shown that Monte Carlo analysis and genetic algorithms can be successfully combined to find solutions in a case with a very large number of possible futures and system designs.

Suggested Citation

  • Joost Buurman & Stephen Zhang & Vladan Babovic, 2009. "Reducing Risk Through Real Options in Systems Design: The Case of Architecting a Maritime Domain Protection System," Risk Analysis, John Wiley & Sons, vol. 29(3), pages 366-379, March.
    • Handle: RePEc:wly:riskan:v:29:y:2009:i:3:p:366-379
    DOI: 10.1111/j.1539-6924.2008.01160.x
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    References listed on IDEAS

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    Cited by:

    1. Maria da Conceição Cunha, 2023. "Water and Environmental Systems Management Under Uncertainty: From Scenario Construction to Robust Solutions and Adaptation," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 37(6), pages 2271-2285, May.
    2. Bridget Tawiah Badu Eshun & Albert P.C. Chan, 2021. "An Evaluation of Project Risk Dynamics in Sino-Africa Public Infrastructure Delivery; A Causal Loop and Interpretive Structural Modelling Approach (ISM-CLD)," Sustainability, MDPI, vol. 13(19), pages 1-24, September.
    3. Sungchul Kim & Ronald Giachetti & Sangsung Park, 2018. "Real Options Analysis for Acquisition of New Technology: A Case Study of Korea K2 Tank’s Powerpack," Sustainability, MDPI, vol. 10(11), pages 1-18, October.
    4. Jinfen Zhang & Ângelo P Teixeira & C. Guedes Soares & Xinping Yan & Kezhong Liu, 2016. "Maritime Transportation Risk Assessment of Tianjin Port with Bayesian Belief Networks," Risk Analysis, John Wiley & Sons, vol. 36(6), pages 1171-1187, June.

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