Strategic Options and Expert Systems: A Fruitful Marriage

Abstract

Business economics does not provide any methodology for appraising strategic investments, relying on informal approaches. Conversely, financial economics offers us plenty of sophisticated mathematical models unsuitable for applications and based on unrealistic assumptions. This paper presents an example of how strategic investments may be handled with a formal but easy-to-undersand tool. While this paper shows a specific application, a real-life case, we think the model here proposed may be generalized, so contributing to developing a new approach to business decisions. In particular, we think of a fuzzy expert system approach as a convenient tool overwhelming many of the shortcomings inherent in the “crisp” approaches of the financial literature (DCF methods, options pricing, dynamic programming), while avoiding at the same time the refusal of any methodology (typical of business economics). The idea here presented develops some results by Magni et al. (2001) and Facchinetti et al. (2001). An evaluation function is drawn up via “if-then” rules; the latter are made to work automatically by means of an expert system, which adequately replicates the evaluation of human experts. A sensitivity analysis is presented to test the soundness of the model.

Keywords: strategic, real options, fuzzy expert system, sensitivity analysis

JEL Classification: C63, C67, C88, D81, G11, G31