Management of Technology Investment Risk with Real Options-Based Design: A case study of an innovative building technology

Abstract

Implementation of innovative technologies is hindered by the perceived risks of technical failure or increased first cost. However, by designing a system to include real options within its architecture and by recognizing the value in operational flexibility, the project’s value is structured to avoid downside risks yet benefit from upside opportunities. A real options based methodology for innovative engineering system design consists of identifying relevant uncertainties, designing options “in ” the system, and modeling the performance of the options-based design subject to the uncertainties. The results guide decision makers on how much to spend on the design and construction of a flexible system. A case study of the market value of an innovative naturally ventilated building with embedded option to install mechanical cooling in the future demonstrates how the option “in ” the system protects the asset from downside outcomes in market value yet allows it to benefit from upside opportunities. Table of Contents