Introduction

One of the challenges of site selection and development is that many fundamental decisions must be made when the full nature of potential geohazards is still unknown. Worse, additional information about the geohazards is often only obtained by beginning construction or, at the least, making significant investments in information gathering. Building options into the site selection and development process is definitely beneficial to the developer of the site - but these can add cost and time delays to the overall project. Making informed tradeoffs between going ahead without options versus investing in the creation of contingent capabilities in site development is can be further complicated by the fact that there may be competitive aspects to site development. The competitive aspects of site development may influence the value of options.

Estimating the Value of Optionality

In large-scale site selection and development, up-front decisions can play major roles in the range of options that are available later in a project. Economies of scale come from making large-scale investments, but those limit what can be done if surprising information turns up during the project (or even later). This approach provides a more structured way of considering tradeoffs between the savings of full-scale commitment early and the ability to adjust to new information later.

There are a number of ways to quantify the value of having decision flexibility. All of them depend in one way or another on the revelation of additional information as the project progresses. If there will be no additional learning, then the value of flexibility for the decision makers is reduced to scale considerations and the time value of resources but there is no benefit from having more information.

Real options valuation techniques provide a methodology for estimating the economic value of flexibility that can take advantage of the revelation of additional information. Whether decision analytic or financial options based in approach, the underlying assumption is that the information can only have non-negative value. The reason is that the decision environment is benign: it doesn't react to the decision-maker's decisions.

In a competitive environment, other decision makers are able to see information as it is revealed and react not only to the information but also to the decisions of the other decision makers who receive information.

Making decisions in a competitive environment influences the value of information. The reason is that all the decision makers can react to the information that is revealed. This has relevance if a site selection decision involves bidding for the site and the value of the site is influenced by the possibility that there are geohazards present. The information on the presence of geohazards, if it is available to all those competing for ownership of the site, may not have the same value for all of the competitors.

Types of Information

From the perspective of the decision maker in a competitive environment, there are three types of information.

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