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

Authors: Mikael Collan; Tero Haahtela; Kalevi Kyläheiko

Addresses: School of Business, Lappeenranta University of Technology, Skinnarilankatu 34, 53851, Lappeenranta, Finland ' BIT Research Center, Aalto University, P.O. Box 15500, FI-00076 AALTO, Finland ' School of Business, Lappeenranta University of Technology, Skinnarilankatu 34, 53851, Lappeenranta, Finland

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.

DOI: 10.1504/IJBIR.2016.077608

International Journal of Business Innovation and Research, 2016 Vol.11 No.1, pp.18 - 37

Received: 08 May 2021
Accepted: 12 May 2021

Published online: 07 Jul 2016 *

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