How real options and ecological resilience thinking can assist in environmental risk management

Stuart Whitten (), Greg Hertzler and Sebastian Strunz

Journal of Risk Research, 2012, vol. 15, issue 3, 331-346

Abstract: In this paper, we describe how real option techniques and resilience thinking can be integrated to better understand and inform decision-making around environmental risks within complex systems. Resilience thinking offers a promising framework for framing environmental risks posed through the non-linear responses of complex systems to natural and human-induced disturbance pressures. Real options techniques offer the potential to directly model such systems including consideration of the prospect that the passage of time opens new options while closing others. The implications (cost) of risk can be described by option prices that describe the net present values generated by alternative regimes in the resilience construct, and the shadow prices of particular attributes of resilience such as the speed of return from a shock and the distance or time to transition. Examples are provided which illustrate the potential for integrated resilience and real options approaches to contribute to understanding and managing environmental risk.

Date: 2012
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Citations: View citations in EconPapers (5)

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DOI: 10.1080/13669877.2011.634525

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