Evaluating technology for system design using real options

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Evaluating technology for system design using
real options

• By Christopher Hynes
• Advisor Professor Karen Willcox
• A financial option gives the holder the right but
  not the obligation to execute a future action.
  (Ex. Buy a stock at a certain price, call
  option).
• Real Options uses option theory to evaluate
  physical or real assets, as opposed to financial
  assets or stocks and bonds.
• Business conditions hold uncertainty risk
• Uncertainty valuable information
• Uncertainty resolves over time, management makes
  changes
• RO incorporates this learning model, while
  traditional analysis neglects this flexibility
  causing gross undervaluing of projects

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Research Question/Objective

• How to quantify the value of future technology?
• How much am I willing to pay (increase in
  complexity, work-hours, cost of interface) now in
  my design so that I can incorporate a technology
  that is not ready now but may be in the future
  and will add value
• Can I choose a portfolio of technology design
  options that will maximize design value but
  minimize risk?
• Applied examples will include noise-reduction
  technologies for commercial airplanes and GM
  cars.