On the usability of real option valuation model types under different types of uncertainty

Mikael Collan, Tero Haahtela and Kalevi Kyläheiko

International Journal of Business Innovation and Research, 2016, vol. 11, issue 1, 18-37

Abstract: This paper discusses the usability of real option valuation model types under different types of uncertainty. Three types of uncertainty are presented (parametric, structural and procedural), followed by a presentation of six different real option valuation types that are variably suitable for different uncertainties that in turn characterise real world decision-making situations. A usability-based mapping of real option valuation models with each type of uncertainty is made and discussed. Implications concerning decision-making are direct: wrong model selection may lead to unreliable or wrong results and, consequently, poor and often expensive investment decisions.

Keywords: real options valuation; ROV; decision making; financial modelling; parametric uncertainty; structural uncertainty; procedural uncertainty; investment decisions. (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (2)

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