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

Joost Buurman, Stephen Zhang and Vladan Babovic

Risk Analysis, 2009, vol. 29, issue 3, 366-379

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.

Date: 2009
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https://doi.org/10.1111/j.1539-6924.2008.01160.x

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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:29:y:2009:i:3:p:366-379

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