Evaluating Alternative Operations Strategies to Improve Travel Time ...

SHRP 2 L11: Final Appendices
option formulation to the analogous elements in Black-Scholes formula. Use of an insurance
option for travel time variability is a rather original application of options theory for the valuation
of travel time reliability, as suggested by the reviewers. However the use of real options and these
techniques is not new in the context of transportation. The reviewer comments and responses are
summarized on Table B.11. Given the unfamiliarity with such methods and questioning of the
approach due to its highly mathematical nature, it is suggested that a workshop or conference
highlighting the use of various financial techniques in the transportation field will help to advance
the understanding and application of these methods.
The options theoretic approach for the valuation of travel-time reliability is an option formulation
that determines the option value for travel-time reliability in terms of the travel time that roadway
users would be willing to sacrifice to obtain a speed guarantee. With the certainty-equivalent of
delay, practitioners can compute the value of reliability for multiple user groups, using wellestablished
values of time with the deterministic value associated with travel-time reliability.
An advantage of the options theoretic approach is that it is a robust and compact method that can
be tailored to reliability analysis for specific roadways and the observed travel-time variability on
them. Unlike stated-preference surveys, the options theoretic approach is not based on fixed
idiosyncratic data. The options theoretic approach can be generalized to travel-time variability
experienced on other roadways or in other regions. It uses readily-available traffic data. This
method converts a stochastic variable (travel time) into a certainty-equivalent measure that can be
treated deterministically in the evaluation of a project or operational treatment.
A limitation of the options theoretic approach is that the formula is inappropriate for analyses in
which travel-time variability cannot be characterized by a log-normal distribution. Determining
which options formulation should be used for specific analyses (particularly for rare events) poses
a potential challenge to the implementation of this methodology by public agencies, particularly if
analysts are unfamiliar with travel-time distributions and benefit-cost evaluation frameworks.
In Appendix C, the rare event formulation for incorporating the valuation of reliability into
investment decisions is presented. The rare-event approach was developed to investigate an
approach for the valuation of travel-time reliability for rare events, and as an approach for optimal
investment decision-making given the uncertainty related to low probability, high consequence
events.
DETERMINING THE ECONOMIC BENEFITS OF IMPROVING TRAVEL-TIME RELIABILITY Page B-32