Real Options Conference 2022

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Assessing optionality and interactions in corporate strategic decisions with simulation decomposition

Corporate strategic decisions are often supported by evaluation with real options framework. However, the majority of real options studies choose to analyze generic types of real options. In this extended abstract, we demonstrate how customized real options can be systematically discovered by employing a recently developed approach called Simulation Decomposition or SimDec. SimDec is an enhancement of Monte Carlo simulation, which allows tracing how different input factors and their interactions affect the outcome(s) while preserving the holistic picture of the overall uncertainty. We show the application of SimDec to the two cases of corporate strategic decision-making: 1. Investment strategy and 2. Compliance with emissions regulations. Both cases demonstrate that SimDec reveals previously hidden interactions of factors in a model and provides actionable outcome by discovering optionality in strategic decisions.

Mariia Kozlova
LUT University

Julian Scott Yeomans
Schulich School of Business, York University


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