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

  title={Reducing Risk Through Real Options in Systems Design: The Case of Architecting a Maritime Domain Protection System},
  author={J. Buurman and Stephen X. Zhang and V. Babovic},
  journal={Microeconomics: Decision-Making under Risk \& Uncertainty eJournal},
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… Expand

Topics from this paper

Using Real Options in the Optimal Design of Water Distribution Networks
AbstractWater supply systems have to satisfy water needs in terms of quantity and quality. The constant changes in urban areas require the regular adaptation of the water supply infrastructure toExpand
An approach for analyzing and managing flexibility in engineering systems design based on decision rules and multistage stochastic programming
ABSTRACT This article introduces an approach to assess the value and manage flexibility in engineering systems design based on decision rules and stochastic programming. The approach differs fromExpand
10 11 Water supply systems have to satisfy water needs in terms of quantity and quality. The 12 constant changes in urban areas require the regular adaptation of the water supply 13 infrastructure toExpand
Long-term adaption decisions via fully and partially observable Markov decision processes
Abstract Long-term decisions, such as the design of infrastructure systems and buildings or the planning of risk mitigation measures, should be made in consideration of the uncertain future. TheExpand
Real Options Analysis for Acquisition of New Technology: A Case Study of Korea K2 Tank’s Powerpack
For sustainable defense management, it is essential to acquire weapons systems that can adapt to future uncertain threats and, at the same time, to invest efficiently with limited budgets. EconomicExpand
Using real options for an eco-friendly design of water distribution systems
This paper presents a real options approach to handling uncertainties associated with the long-term planning of water distribution system development. Furthermore, carbon emissions associated withExpand
An Approach for Integrating Valuable Flexibility During Conceptual Design of Networks
Energy and industrial networks such as pipeline-based carbon capture and storage infrastructures and (bio)gas infrastructures are designed and developed in the presence of major uncertainties.Expand
Valuing flexibilities in the design of urban water management systems.
Results show that integrating uncertainty and flexibility explicitly into the decision-making process can reduce initial capital expenditure, improve value for investment, and enable decision-makers to learn more about system requirements during the lifetime of the project. Expand
Valuation of Capabilities and System Architectural options to Meet Affordability Requirement
Abstract : Weapon systems are designed for very long operational lives, which exposes them to risks of technological and operational obsolescence that can greatly shorten their expected operationalExpand
Architecting Water Supply System - A Perspective from Value of Flexibility
Water supply system is socially, politically, and financially critical, and long term security of water supply has to be met in spite of the huge uncertainty in its operation decades since the timeExpand


Value-at-risk analysis for real options in complex engineered systems
A simple but powerful real options valuation methodology suitable for valuing flexibility in complex engineered systems based on value-at-risk analysis and relies on a standard discounted cash flow approach is presented. Expand
Building Real Options into Physical Systems with Stochastic Mixed-Integer Programming
A framework for exploring real options in physical systems that uses stochastic mixed-integer programming to manage the path-dependency and interdependency features and enables the analyst to include more technical details and develop explicit plans for the execution of projects according to the contingencies that arise. Expand
Architecting/Designing Engineering Systems Using Real Options
It is suggested that the methods of “options analysis”-that have revolutionized thinking about investments -can provide a conceptual basis for defining optimal configurations and provide a clear rationale for when to design specific types of flexibility into the system. Expand
Screening for Real Options “In” an Engineering System: A Step Towards Flexible System Development
The goal of this research is to develop an analytical framework for screening for real options “in” an engineering system. Real options is defined in the finance literature as the right, but not theExpand
An Integrated Systems Architecture to Provide Maritime Domain Protection
The focus of this research is to address the criticality and vulnerability of commercial shipping in the Straits of Mallacca by designing and evaluating competing systems architectures that couldExpand
Dynamic strategic planning for technology policy
  • R. Neufville
  • Computer Science, Economics
  • Int. J. Technol. Manag.
  • 2000
The principles of Dynamic Strategic Planning are described, specific methods that are effective for carrying them out are indicated, and their use through application to the formulation of policy on low-emission automobiles in the United States is illustrated. Expand
NASA technology assessment using real options valuation
A set of computational procedures that quantifies the option value of each technology in the context of prioritizing advanced technologies for NASA funding and illustrates the detailed calculations using one of them—lightweight propellant tank technology. Expand
A Case for Using Real Options Pricing Analysis to Evaluate Information Technology Project Investments
This paper presents the first application of the Black-Scholes model that uses a real world business situation involving IT as its test bed, and makes the case for the generalizability of the approach it discusses to four IT investment settings. Expand
Real Options by Spreadsheet: Parking Garage Case Example
This technical note shows how designers of infrastructure systems can evaluate flexibility in engineering systems in fairly simple ways. Specifically, it illustrates a spreadsheet approach to valuingExpand
Using Binomial Decision Trees to Solve Real-Option Valuation Problems
This work uses dynamic programming to solve the binomial decision tree with risk-neutral probabilities to approximate the uncertainty associated with the changes in the value of a project over time and provides greater flexibility in the modeling of problems. Expand