Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology
Author(s)Greden, Lara; de Neufville, Richard; Glicksman, Leon R.
Implementation of innovative technologies is hindered by the perceived risks of technical failure or increased first cost. However, by designing a system to include real options within its architecture and by recognizing the value in operational flexibility, the project’s value is structured to avoid downside risks yet benefit from upside opportunities. A real options based methodology for innovative engineering system design consists of identifying relevant uncertainties, designing options “in” the system, and modeling the performance of the options-based design subject to the uncertainties. The results guide decision makers on how much to spend on the design and construction of a flexible system. A case study of the market value of an innovative naturally ventilated building with embedded option to install mechanical cooling in the future demonstrates how the option “in” the system protects the asset from downside outcomes in market value yet allows it to benefit from upside opportunities.
Massachusetts Institute of Technology. Engineering Systems Division
ESD Working Papers;ESD-WP-2005-04