Empirical Evidence in Support of a Proposed Methodology for Valuing Uncertainty and Flexibility in Complex, Large-Scale Systems

Abstract

This paper presents empirical evidence, taken from the largest private real estate development project in the world, in support of a proposed quantitative methodology for incorporating uncertainty and flexibility in systems design. The proposed methodology, though in the early stages of development, offers an interesting and hopeful means by which to address a number of the practical impediments to the wider acceptance and use of real options analysis. While its originators tested it on highly simplified, self-constructed data, this paper examines its appropriateness and usefulness using data from a real-world systems design project of great complexity and scale.

Keywords: Large-Scale Complex Systems, Valuation, Uncertainty, Flexibility, Systems Design, Real Options

JEL Classification: C53, G39, L70