Evaluating Alternative Operations Strategies to Improve Travel Time ...

SHRP 2 L11: Final Appendices
TABLE B.11 –SUMMARY OF REVIEWER COMMENTS AND RESPONSES
Comment #1:
Although one can create many different classification schemes within the field of options and
financial derivatives, in view of the need to impute dollar values to improvements in travel time
reliability in Project L11, the literature suggests there are three relevant classes:
1. Financial options – these are concerned with valuing a financial asset given the underlying’s
price, the strike price, the time to expiration, the volatility (variability), and the risk free interest rate
2. Real Options – the valuation of one or more contingencies that unfold over time, such as a
decision to proceed with Phase II of a project after making a positive feasibility determination
under Phase I.
3. Valuing Insurance Contracts – what a buyer of insurance is willing to pay for an insurance
contract based on the present value of expected loss.
Each of these approaches is indicative of how one might value improvements in travel time
reliability. None by itself appears to be strictly applicable and none may be possible without using
supplemental techniques to evaluate how road users trade off reductions in the variability in travel
time against reductions in average travel time and out-of-pocket costs.
Response #1
The comment presents a useful taxonomy for the types of options. Our travel time reliability option
formulation is derived from options representations of insurance. In other words, the basic insight of
the approach is that one can think of unreliability as analogous to the occurrence of an undesirable
outcome in some random event context (e.g., an accident that impairs the value of a car). In an auto
insurance context, one can think of the insurance policy as a mechanism for compensating the driver
for any lost value due to an accident during the life of the contract. Carrying this notion over to
travel time reliability, one can imagine that an insurance policy could be crafted that compensated
the driver for the unexpected occurrence of speeds below the expected (average) speed. Such a
policy does not exist for daily vehicle travel, although such policies do exist for long trips (e.g.
overseas travel insurance). So, if one accepts that the CONCEPT of speed insurance makes sense,
then the Black-Scholes formulation we are using makes sense, and one can calculate the speedequivalent
"premium" to be assured compensation for encountering speeds less than the mean
(expected) speed.
DETERMINING THE ECONOMIC BENEFITS OF IMPROVING TRAVEL-TIME RELIABILITY Page B-33