Real options analysis brought to life

In my office at Tilburg University
24
Nov

Real options analysis brought to life: in my office at Tilburg University

Real options analysis in my office at Tilburg UniversityROA brought to life

Situation: a pot in which Brussels Sprouts (are supposed to) grow. Not only Brussels Sprouts are grown, also caterpillars

Decision to make: to ask or not to ask my colleague Nick to remove the Brussels Sprouts from the office

Decision variable: ratio sprouts/caterpillars

Option: the option to abandon the pot

Payoff at any instant: benefit of the sprouts minus the cost of having caterpillars on my lap (or the other way around for people that enjoy caterpillars more than sprouts)

Uncertainty: future change in the decision variable. It is assumed that both the growth in Brussels Sprouts and caterpillars follow a Geometric Brownian motion (Figure 1)

Research question: the optimal threshold level of the ratio sprouts/caterpillars at which I will decide to remove the pot from the office (Figure 2)

 

Acknowledgements: the author would like to thank drs. Nick Huberts for his useful comments and providing the figures

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