The Option Value of Scientific Uncertainty on Pest - Resistance Development of Transgenic Crops
In this paper the option value of waiting under scientific uncertainty will be derived using the difference between the geometric Brownian motion and the mean reverting process by applying contingent claim analysis. The results will be compared with those generated by either using a geometric Brownian motion or a mean-reverting process only. An example based on the decision problem whether or not to release herbicide tolerant rape seed in the EU will be used to illustrate the differences. The paper contributes to the suggestion made by biologists to further analyze the sensitivity of the results using the real option approach, provides insights about the magnitude of error that can be made by choosing the wrong process, provides a solution to the problem and highlights the implication for the decision of whether or not to release transgenic crops. The results show that scientific uncertainty is less important than one would expect at first hand.
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