Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology
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 avoi...
| Main Authors: | , , |
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| Format: | Working Paper |
| Language: | en_US |
| Published: |
Massachusetts Institute of Technology. Engineering Systems Division
2016
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| Online Access: | http://hdl.handle.net/1721.1/102771 |
| _version_ | 1826203933153951744 |
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| author | Greden, Lara de Neufville, Richard Glicksman, Leon R. |
| author_facet | Greden, Lara de Neufville, Richard Glicksman, Leon R. |
| author_sort | Greden, Lara |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T12:45:44Z |
| format | Working Paper |
| id | mit-1721.1/102771 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T12:45:44Z |
| publishDate | 2016 |
| publisher | Massachusetts Institute of Technology. Engineering Systems Division |
| record_format | dspace |
| spelling | mit-1721.1/1027712019-04-11T05:37:37Z Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology 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. 2016-06-01T16:25:18Z 2016-06-01T16:25:18Z 2005-06 Working Paper http://hdl.handle.net/1721.1/102771 en_US ESD Working Papers;ESD-WP-2005-04 application/pdf Massachusetts Institute of Technology. Engineering Systems Division |
| spellingShingle | Greden, Lara de Neufville, Richard Glicksman, Leon R. Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title | Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title_full | Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title_fullStr | Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title_full_unstemmed | Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title_short | Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology |
| title_sort | management of technology investment risk with real options based design a case study of an innovative building technology |
| url | http://hdl.handle.net/1721.1/102771 |
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