Evaluating Alternative Operations Strategies to Improve Travel Time ...

SHRP 2 L11: Final Appendices
Comment #5:
Real options is a specific branch of options evaluation. It does not concern financial assets, but
rather other tangible assets in which the value of the option depends upon one or more contingent
events. Examples are raising tolls at such time traffic volumes reach a certain level, investing in the
next stage of drug development assuming preliminary drug trials are successful, pursuing a line of
research once a positive feasibility determination has been made, and developing the next
component of a modular electronics platform once the market for additional modules have been
established. In each of these examples, the value is conditional upon an event occurring in the
future or upon a condition state being realized. The term Real Options for the most part has a
specific meaning among those who are expert in this branch of financial analysis. It is possible that
the semantic elasticity of the term “real options” allows it to be applied to valuing travel time
reliability. However, one of the country’s leading experts on Real Options we consulted does not
think this approach is applicable to valuing travel time reliability:
Response #5:
The reviewer is correct that the common use of the term Real Options is in a capital budgeting
context, and from the fact that this setting involves real (vs. financial) assets. Others, however, make
the distinction between whether the option is purchased, or arises naturally in the course of decision
making under uncertainty. Still others distinguish between whether the option is tradable or not.
Since we know of no one else who has studied travel time reliability using the options approach, it is
not clear what is the proper terminology to use. However, Professor Lenos Trigeorgis, a well-known
expert in the field of real options analysis, applied the Real Options term in an analogous setting;
i.e., a decision to increase flexibility of production processes as a defense against exchange rate
variability. (In this case, value arose from increasing flexibility.)
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DETERMINING THE ECONOMIC BENEFITS OF IMPROVING TRAVEL-TIME RELIABILITY Page B-35