Article ID: | iaor20052961 |
Country: | United States |
Volume: | 14 |
Issue: | 1 |
Start Page Number: | 5 |
End Page Number: | 20 |
Publication Date: | Mar 2005 |
Journal: | Production and Operations Management |
Authors: | Park Chan S., Miller Luke T. |
Keywords: | risk |
This paper studies the impact of learning on a multi-staged investment scenario. In contrast to other models in the real options literature in which learning is viewed as a passive consequence of the delay period, this paper quantifies information acquisition by merging statistical decision theory with the real options framework. In this context, real option attributes are discussed from a Bayesian perspective, thresholds are identified for improved decision-making, and information's impact on downstream decision-making is discussed. Using real data provided by a firm in the aerospace maintenance, repair, and overhaul industry, the methodology is used to guide a multi-phased irreversible investment decision involving process design and capacity planning.