A technical note on “A fuzzy set approach for R&D portfolio selection using a real options valuation model” by Wang and Hwang (2007)

In this paper, three critical issues with the paper “A fuzzy set approach for R&D portfolio selection using a real options valuation model”, coauthored by Wang and Hwang and published in Omega 2007 are addressed. Shortcomings of the original work are highlighted and corrective measures to improve the approach are proposed.     

模糊随机不确定环境下考虑决策者主观判断的亚式期权定价

考虑金融市场的不确定性包含随机性和模糊性两个方面,把标的资产价格视作一个模糊随机过程,以连续几何平均亚式看涨期权为例运用随机分析和模糊集理论研究了模糊随机不确定环境下的亚式期权定价问题。首先,推导出了亚式期权模糊价格的任意水平截集,并将如何计算给定任一个参考价格的置信度问题转化为求解最优化问题。然后,研究了两种考虑决策者主观判断的亚式期权定价,一是引入模糊目标表示决策者对期权预期价格的满意度,给出可靠度大于决策者满意度的亚式期权预期价格的范围;二是引入悲观-乐观指数表示决策者的悲观程度,基于加权函数和可能性估计测度定义模糊数的可能性均值,得到可能性均值意义下的亚式期权定价公式。最后,给出了一个数值例子说明了模型的可行性和实用性。     

A dynamic ERP critical failure factors modelling with FCM throughout project lifecycle phases

Implementation of enterprise resource planning systems (ERPs) is a complex and costly task which usually results in serious failures. Numerous factors affect these projects implementation due to their size, complexity and high chance of failure. Therefore, identifying these factors in ERP projects is a critical issue. The majority of previous publications have been conducted in identifying ERP critical success factors (CSFs) rather than critical failure factors (CFFs). In order to help practitioners, this article studies the CFFs in ERP implementation projects. The implications of interdependency among failure factors are also usually overlooked by project managers due to perceived complexity in modelling and analysing influential factors. With this in mind, we have proposed a fuzzy cognitive map (FCM)-based dynamic model of ERP failure factors through project lifecycle phases. The main advantage of FCM lies in them being capable of modelling complex phenomena based on the experts’ perceptions. This tool models uncertainty and related events, imitating human reasoning. Moreover, FCMs enable the developing of forecasting exercises through simulations. Practitioners would thus assess the joint influence of ERP implementation failure factors on project outcomes. The results make known to practitioners which problems will arise if the failure factors are not treated, and how these will impact on the outcomes of projects. Therefore, the proposed approach would help them to manage ERP implementation projects in a more effective and proactive way.     

Decision making in the newsvendor problem: A cross-national laboratory study

In this paper, we conduct a laboratory experiment using the classic newsvendor problem to examine cross-national differences in inventory ordering patterns between Chinese and American decision makers based on a theoretical examination of the role of the Doctrine of the Mean in Chinese decision making. Drawing on the theory of context-dependent preferences (specifically extremeness aversion), we also revisit the flat-maximum hypothesis of Bolton and Katok [12], i.e., “thinning the set of order options leads to newsvendor decisions that achieve a higher proportion of maximum expected profit.” The results show that the “pull-to-center” effect is more prominent for Chinese than Americans, i.e., average order quantities of Chinese subjects are closer to the anchor of mean demand than those of American subjects. Furthermore, we find that thinning the set of order options such that the optimal order quantity is a middle option, not an extreme option in the choice set, leads to better performance in newsvendor decisions, which complements the flat-maximum hypothesis.     

Using partially observed Markov processes to select optimal termination time of TV shows

This paper presents a method for optimal control of a running television show. The problem is formulated as a partially observed Markov decision process (POMDP). A show can be in a “good” state, i.e., it should be continued, or it can be in a “bad” state and therefore it should be changed. The ratings of a show are modeled as a stochastic process that depends on the show's state. An optimal rule for a continue/change decision, which maximizes the expected present value of profits from selling advertising time, is expressed in terms of the prior probability of the show being in the good state. The optimal rule depends on the size of the investment in changing a show, the difference in revenues between a “good” and a “bad” show and the number of time periods remaining until the end of the planning horizon. The application of the method is illustrated with simulated ratings as well as real data.     

Are real options more valuable in the presence of agency conflicts?

The theory on real options has extended the traditional net present value rule in order to capture the value of flexibility in investment decisions. Typically, the theory of real options does not take into account agency conflicts (between central and divisional management). In this paper, we investigate the influence of agency conflicts on real options within a LEN-type model. We extend a standard LEN model with investment activities by explicitly considering the possibility to abandon an investment project after all parties involved have received further information about the project’s development. Especially, we analyze how the option’s flexibility value is influenced by the agency conflict. Our analysis shows that the real option alters the trade-off between risk sharing and incentives that underlies the agency conflict. Thereby, situations can occur in which central (and divisional) management evaluates the abandonment option ex ante differently than ex post. Using this framework, we discuss the role of commitment and the advantages of centralization and delegation of the abandonment decision.

Scenarios,Real Options and Integrated Risk Management

In the 1970s, scenario planning gained prominence as a strategic management tool. Scenario planning encourages managers to envision plausible future states of the world and consider how to take advantage of opportunities and avoid potential threats. In the last decade, finance researchers have developed real option analysis as a way to value investments under uncertainty. Scenario planning and real option analysis have complementary strengths and weaknesses as tools for managers making strategic investment decisions under uncertainty. We combine these two approaches in an integrated risk management process. This process involves scenario development, exposure identification, formulating risk management responses, and implementation steps. We advocate a corporate-level perspective on managing risk that takes into consideration the full range of exposures across a firm’s portfolio of businesses. In contrast with the predominant emphasis on quantitative analysis in the real option literature, this study illustrates qualitative assessment of real options.     

A real options model of market entry: Endogenous uncertainty and exogenous uncertainty

We develop a real options model of market entry that focuses on the dueling growth and deferral options by differentiating between endogenous uncertainty and exogenous uncertainty. While exogenous uncertainty influences the growth option market value or price, it is endogenous uncertainty that influences the value of the growth option through the ability to create a competitive advantage from preemptive market entry. First, the firm can decrease the exercise price of the growth option (i.e., the cost of the follow-on investment) through experiential learning that reduces endogenous uncertainty. Second, the firm can increase the relative discounted cash flows of the follow-on investment due to its ability to influence market demand that reduces endogenous uncertainty. On the other hand, the value of the deferral option increases with exogenous uncertainty as firms cannot influence exogenous uncertainty, and therefore, should invest elsewhere while waiting for the exogenous uncertainty to subside. As such, we provide a solution to the conundrum that the value of both the growth option and the deferral option increase with uncertainty. Finally, we demonstrate how the model addresses sequential market entry; irreversibility and market entry mode; competition; scarce strategic resources; host country development level; and industry life cycle stage.     

投资时限对项目期权价值的影响分析

针对一般实物期权研究中,项目投资无限期假设的不足,研究实际中对投资时间有限期要求项目的投资期权评价问题.文章以我国房地产投资政策为背景,建立模型,研究给出了对投资机会限定在时间T内有效、投资者在其中具有投资管理柔性的投资项目的价值评价.用数值分析方法讨论了投资时限对投资机会价值和对投资者最优决策的影响,给出了投资者在等待以降低投资风险和尽快投资以避免机会失效之间的权衡.     

A Learning Real Options Framework with Application to Process Design and Capacity Planning

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.     

Improving Environmental Leadership: Asking Better Questions about Existing Inefficiencies

Physicist John Wheeler once commented that, “we shape the world by the questions we ask.” By asking better questions about how we can more efficiently produce our nation's goods and services, environmental leadership no longer means ratcheting down the economy. Rather, it becomes more an issue of how we can put our technological know-how and leadership to work. When we think about encouraging more investment in more productive technologies, we are taking the first step that will both save money and reduce environmental impacts. And it appears that more businesses are beginning to ask those tougher and better questions. The remaining question is whether we can sufficiently increase the number of businesses who are willing to ask those harder questions, and who are willing to explore new ways to turn missed opportunities into real world savings – to the benefit of the environment. Paraphrasing the great English economist, John Maynard Keynes, “the difficulty lies not with the new ideas, but in escaping the old ones.”     

Stock screening with use of multiple criteria decision making and optimization

A new method for the stock ranking based on the multiple criterion decision making and optimization is proposed. Two general criteria are used in the analysis. The first of them is based on the financial indices and may be treated as the criterion of firm's “health” or its financial performance. The second one is the two-criteria performance of firm based on the stock prices. It represents the firm's market success. The method rests on the selection of the stocks with a great correlation of the firm's financial performance and its market success. The local criteria are built in the form of the membership function of corresponding fuzzy subsets. Two different strategies for stock ranking and three most popular methods for local criteria aggregation are compared. As the example the values of financial rations and prices from database comprising the data of 162 firms from subsector of the biotechnology of US economy were used. It is shown that the proposed method makes it possible to select a small group of “good” stocks characterized by a great coincidence of firm's financial performance and its market success. The method rejects from the consideration all the “unsafe” firms, i.e., such ones that their market success is based rather on the public relations, rumors and other rather unreliable information. The method is addressed to those who prefer to select for a portfolio only the firms which demonstrate the closeness of their overall financial performance in the past year and success in the Stock Exchange in the following year.     

The impact of tax uncertainty on irreversible investment

Traditional models of capital budgeting with taxes are based on deterministic tax rates and tax bases. In reality, however, there are multiple sources of tax uncertainty. Frequent tax reforms make future taxation of investments a stochastic process. Fiscal authorities and tax courts create additional tax uncertainty by interpreting current tax laws differently. Moreover, simplified models that anticipate the actual tax base incorrectly contribute to tax uncertainty as perceived by investors. I analyze the effects of stochastic taxation on investment behavior in a real options model. The investor holds an option to invest in an irreversible project with stochastic cash flows and stochastic tax payments. Pre-tax cash flows and tax payments are assumed to be correlated. Increased tax uncertainty has an ambiguous impact on investment timing. For low tax uncertainty, high cash flow uncertainty and high correlation of cash flows and tax payments, increased tax uncertainty is likely to accelerate investment. A higher expected tax payment delays investment. A higher after-tax discount rate affects investment timing ambiguously.     

Multi-choice goal programming

The situation of multi-choice aspiration levels (MCAL) may exist in many decision/management problems. However, the problem cannot be solved by current goal programming (GP) techniques. In order to improve the utility of GP and solve the MCAL problem, this paper proposes a new idea for programming the MCAL problem. The proposed method allows decision-makers (DMs) to set multiple aspiration levels for their problems in which “the more/higher is better” and “the less/lower is better” in the aspiration levels are addressed. In addition, illustrative examples are given to demonstrate the correctness of the proposed model.     

项目区域投资的期权特征与决策研究

运用期权的观点和方法研究项目区域投资问题具有重要的现实意义.在衡量投资区域机会价值的基础上,分析了项目区域投资的期权特征,建立了项目区域投资决策的实物期权模型,为实际中的多区域投资决策问题提供了一种量化分析方法.     

阶段性投资最优比例问题的实物期权方法

以研发成功的初创企业为例,针对两阶段投资决策问题,描述了柔性决策所具有的实物 期权思想,根据相应的投资准则得到项目决策的执行概率,再结合项目收益过程的分析,建立 起包括决策柔性价值在内的项目总价值的数学模型. 在此基础上可以分析投资比例对项目价 值的影响,并得到最优值. 文章结合案例进行了数值计算,并对结果做了分析.     

债务容量与成长期权关系研究

本文利用期权博弈方法,探析投资成长期权如何影响公司债务融资决策问题。在不确定条件下,综合考虑利率、税率、债息和债务的期限结构这些影响融资和投资的重要因素,构建期权博弈理论模型,确定企业的最优债务容量,并运用数值方法给出了债务容量与投资成长期权的回报率之间是非线性的"U"形关系的结论。研究表明,当投资成长期权的回报率较低时,债务容量随着投资成长期权的回报率增加而债务容量减少;当投资成长期权的回报率达到较高水平时,债务容量随着投资成长期权的回报率增加而债务容量增加。从而给出了关于债务容量与投资成长期权之间的内在关系的新理论解释。     

Challenges and solutions for marketing in a digital era

Internet usage continues to explode across the world with digital becoming an increasingly important source of competitive advantage in both B2C and B2B marketing. A great deal of attention has been focused on the tremendous opportunities digital marketing presents, with little attention on the real challenges companies are facing going digital. In this study, we present these challenges based on results of a survey among a convenience sample of 777 marketing executives around the globe. The results reveal that filling “talent gaps”, adjusting the “organizational design”, and implementing “actionable metrics” are the biggest improvement opportunities for companies across sectors.     

R&D project evaluation: An integrated DEA and balanced scorecard approach

We present and demonstrate a multi-criteria approach for evaluating R&D projects in different stages of their life cycle. Our approach integrates the balanced scorecard (BSC) and data envelopment analysis (DEA) and develops an extended DEA model. The input and output measures for the integrated DEA–BSC model are grouped in “cards” which are associated with a “BSC for R&D projects”. The BSC is embedded in the DEA model through a hierarchical structure of constraints that reflect the BSC balance considerations. We illustrate the proposed approach with a case study involving an industrial research laboratory that selects and executes dozens of R&D projects every year.     

Process Improvement,Learning, and Real Options

We use a real‐options approach to analyze investments in process improvement. We develop a simple, stochastic model of a firm making investment decisions in process improvement. Our analysis offers several interesting insights into investments in process improvement. First, early investment in process improvement results in valuable knowledge, which helps increase the value of the option to invest in process improvement in future periods. This may motivate a firm to invest in process improvements as early as possible. Second, it may be optimal for a firm to stop investing when such investments do not create enough value in the later stages of the investment horizon. Third, although one would expect the state of a firm's process relative to that of other firms to impact a firm's decision to invest in process improvement, this study finds that the impetus is conditional and identifies these conditions. Finally, in such an environment, the delay of investment in process improvement incurs an opportunity cost for a firm, and we show that the traditional net present value rule must incorporate this opportunity cost and the knowledge‐induced change in future option values to lead to a correct investment decision.