Group-Managed Real Options

We study a standard real-option problem in which sequential decisions are made through voting by a group of members with heterogeneous beliefs. We show that, when facing both investment and abandonment timing decisions, the group behavior cannot be replicated by that of a representative “median” member. As a result, members’ disagreement generates inertia—the group delays investment relative to a single-agent case—and underinvestment—the group rejects projects that are supported by a majority of members, acting in autarky. These coordination frictions hold in groups of any size, for general voting protocols, and are exacerbated by belief polarization.

Effect of root and butt rot uncertainty on optimal harvest schedules and expected incomes at the stand level

• Key message Root and rot (RBR) caused byHeterobasidion parviporumNiemelä & Korhonen andHeterobasidion annosum(Fr.) Bref. damages Fennoscandian spruce stands. In case the rot infection and its severity are unknown, the mere risk of infection should seldom affect the harvest timing. When it does, the gains by harvesting earlier are minimal. • Context It has been suggested that stands infected by RBR should be harvested earlier than the healthy ones. Yet, we must decide on harvest timing decisions without reliable information on the infection. • Aims We studied if harvesting earlier pays off under RBR uncertainty. • Methods We structured the uncertainty with a decision tree and calculated the optimal rotations based on expected net present values. We compared rotation lengths to those of healthy stands and calculated gains from earlier harvesting. • Results The inclusion of RBR-related uncertainty in the model changed the rotation length of only 14–23% of the stands. The average reduction was 1.3–4.7 years. Yet, the gain from harvesting earlier was too low to be considered. • Conclusion In the absence of information on the extent and severity of RBR, it seldom pays off to advance harvests. The value growth in healthy trees tends to compensate for the value reduction due to rot.

TIMING DECISIONS OF HOUSING SALES AND DEVELOPMENT BASED ON REAL OPTION THEORY

Based on the real option theory, this paper studies the impact of uncertainty on the timing decisions required in housing development and sales. Data of newly-built houses and corresponding plots in Hangzhou, China, are used for empirical analysis. In order to better reflect the changes in market demand under frequent policy intervention, in addition to the usual price volatility, this paper introduces the volatility of trading volume to measure the uncertainty of China’s real estate market. The results show that the volatility of trading volume has a significant impact on timing decisions. Also, trading volume volatility can better reflect the characteristic of deferred option than can price volatility, especially during the sales phase. This study provides evidence to support Bar-Ilan and Strange’s (1998) research of sequential investment. Because of the existence of the second option, i.e., sales timing, the starts in the first stage are not too sensitive to uncertainty. In the case of the second option, the longer the construction period is, and the lower the cost of the first stage is, the higher will be the probability of triggering the start. In addition, the characteristics of market risk aversion are obvious in the study area, especially in the suburban area.