Real options based approaches to decision making under uncertainty

Most of the research in the process systems engineering literature has focused within an enterprise's boundaries without recognizing the existence of financial markets to mitigate the risks associated with planning decisions made in the face of uncertainty. This paper discusses the incorporation of a market-based technique known as real options valuation (ROV) to models of pharmaceutical portfolio management and pollution abatement planning. The key managerial insights of this approach, that external financial market information can be used for valuing the flexibility of internal planning decisions and that both financial as well as real assets can be used to achieve desired objectives, are presented through planning case studies that demonstrate the capabilities of the models.