Real Options "in" Projects and Systems Design ... - Title Page - MIT

3Real Options "in" Projects and Systems Design- Identification of Options and Solution for Path DependencybyTao WangSubmitted to the Engineering Systems DivisionOn May 17th, 2005 in Partial Fulfillment of theRequirements for theDegree of Doctor of Philosophyin Engineering SystemsAbstractThis research develops a comprehensive approach to identify and deal with real options “in”projects, that is, those real options (flexibility) that are integral parts of the technical design. Itrepresents a first attempt to specify analytically the design parameters that provide goodopportunities for flexibility for any specific engineering system.It proposes a two-stage integrated process: options identification followed by options analysis.Options identification includes a screening and a simulation model. Options analysis develops astochastic mixed-integer programming model to value options. This approach decreases thecomplexity and size of the models at each stage and thus permits efficient computation eventhough traditionally fixed design parameters are allowed to vary stochastically.The options identification stage discovers the design elements most likely to provide worthwhileflexibility. As there are often too many possible options for systems designers to consider, theyneed a way to identify the most valuable options for further consideration, that is, a screeningmodel. This is a simplified, conceptual, low-fidelity model for the system that conceptualizes itsmost important issues. As it can be easily run many times, it is used to test extensively designsunder dynamic conditions for robustness and reliability; and to validate and improve the details ofthe preliminary design and set of possible options.The options valuation stage uses stochastic mixed integer programming to analyze howpreliminary designs identified by the options identification stage should evolve over time asuncertainties get resolved. Complex interdependencies among options are specified in theconstraints. This formulation enables designers to analyze complex and problem-specificinterdependencies that have been beyond the reach of standard tools for options analysis, todevelop explicit plans for the execution of projects according to the contingencies that arise.The framework developed is generally applicable to engineering systems. The dissertationexplores two cases in river basin development and satellite communications. The frameworksuccessfully attacks these cases, and shows significant value of real options “in” projects, in theform of increased expected net benefit and/or lowered downside risk.Thesis Advisor: Dr. Richard de NeufvilleTitle: Professor of Engineering Systems and of Civil and Environmental EngineeringMIT Engineering Systems Division