Technology Investment Decision-Making Under Uncertainty

Information Technology and Management, Forthcoming

36 Pages Posted: 5 Mar 2015 Last revised: 6 Mar 2015

See all articles by Robert J. Kauffman

Robert J. Kauffman

Singapore Management University; Singapore Management University - School of Information Systems

Jun Liu

Agency for Science, Technology and Research; Singapore Management University

Dan Ma

Singapore Management University

Date Written: January 5, 2015

Abstract

Innovations involving information technology (IT) provide potentially valuable investment opportunities for industry and government organizations. Significant uncertainties are associated with decision-making for IT investment though, a problem that senior executives have been concerned about for a long time. The uncertainties include consumer, market and regulatory responses, IT-driven changes in operational and transactional performance, technology standards and competition, and future market conditions. All these things have an impact on organizations’ willingness to adopt. As a result, traditional capital budgeting, investment experience, and intuition have not been very effective in IT investment decision-making. We propose a new option-based stochastic valuation modeling approach for IT investment under uncertainty that incorporates a mean reversion process to capture cost and benefit flow variations over time. We apply the proposed approach in two industry settings: to a large-scale IT investment in the consolidation of data marts at a major airline, and to a mobile payment system infrastructure investment on the part of a start-up. The applications supported the evaluation of the proposed methods, and offered some illustrations about the kinds of managerial insights that can be obtained. We also report on several extensions that demonstrate how the creation of useful management findings from the modeling approach can be supplemented with project value sensitivity analysis and the use of simulation-based least-squares Monte Carlo valuation. The findings are useful to assess the power and value of the approach.

Keywords: Decision-making under uncertainty, economic analysis, IT investment, mean reversion process, mobile payments, real option analysis, technology valuation

Suggested Citation

Kauffman, Robert J. and Liu, Jun and Ma, Dan, Technology Investment Decision-Making Under Uncertainty (January 5, 2015). Information Technology and Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2573896

Robert J. Kauffman

Singapore Management University ( email )

Li Ka Shing Library
70 Stamford Road
Singapore 178901, 178899
Singapore
65-6828-929 (Phone)

Singapore Management University - School of Information Systems ( email )

80 Stamford Road
Singapore, 178902
Singapore

Jun Liu (Contact Author)

Agency for Science, Technology and Research ( email )

1 Fusionopolis Way
#16-16 Connexis
Singapore, 138632
Singapore

Singapore Management University ( email )

School of Information Systems
80 Stamford Road
Singapore, 178902
Singapore

Dan Ma

Singapore Management University ( email )

School of Information Systems
80 Stamford Road
Singapore 178901
Singapore

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