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A fuzzy expert system for solving real-option decision processes


  • Carlo Alberto Magni



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

  • Carlo Alberto Magni, 2009. "A fuzzy expert system for solving real-option decision processes," PROYECCIONES FINANCIERAS Y VALORACION 005677, MASTER CONSULTORES.
  • Handle: RePEc:col:000463:005677

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    References listed on IDEAS

    1. Estache, Antonio & Rodriguez Pardina, Martin & Rodriguez, Jose Maria & Sember, German, 2003. "An introduction to financial and economic modeling for utility regulators," Policy Research Working Paper Series 3001, The World Bank.
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    Cited by:

    1. Stefano Carlo Alberto Magni & Giovanni Mastroleo, 2007. "The use of fuzzy logic and expert systems for rating and pricing firms: A new perspective on valuation," Managerial Finance, Emerald Group Publishing, vol. 33(11), pages 836-852, October.
    2. Magni, Carlo Alberto, 2004. "Rating and ranking firms with fuzzy expert systems: the case of Camuzzi," MPRA Paper 5889, University Library of Munich, Germany.
    3. 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).
    4. Magni, Carlo Alberto, 2007. "Investment decisions, equivalent risk and bounded rationality," MPRA Paper 6073, University Library of Munich, Germany.

    More about this item


    fuzzy logic; expert systems; real option;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models


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