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Options Based Software Economics

Software engineering processes based on options models are becoming better understood. The following links provide some background materials for these concepts. This set of resources is the basis of a discussion of how to make management decisions in the presence of uncertainty; as well as how to make tradeoff decisions in software development projects.

"Real Options" is a term coined by Stewart Myers in 1977. It referred to the application options pricing theory to the valuation of non-financial or "real" investments with learning and flexibility. Software development and IT investments are domains where "real options" can be applied.


  Authors of Real Options Papers
  Hakan Erdogmus papers on options use in software decision making. Additional research papers

Aligning Software Investment Decisions with the Markets

Building a Business Case for COTS-Centric Development: An Investment Analysis Approach

Comparative Evaluation of Software Development Strategies Based on Net Present Value

Costing of COTS-Based Systems: An Initial Framework

COTS Process Issues in Military Applications

Valuation of Complex Options in Software Development

Value of Commercial Software Development Under Technology Risk

Quantitative Approaches for Assessing the Value of COTS-Centric Development

Management of License Uncertainty in COTS-Based Software Development

Strategic Analysis of Component–Based Development

Strategic Analysis of Application Framework Investments

Keep Your Options Open" Extreme Programming and Economics of Flexibility


Kevin Sullivan's papers

Software Design as an Investment Activity: A Real Options Perspective

Software Economics: A Roadmap

An Options Approach to Software Prototyping

Software Design Decisions as Real Options

  John Favro's paper's site contains much to say about real options and agility

A Comparison of Approaches to Reuse Investment Analysis

When the Pursuit of Quality Destroys Value

Value Based Software Reuse Investment

Integrating Feature Modeling with the RSEB

Put Value Creation First

Strategic Analysis of Component-Based Development Position Paper

Strategic Analysis of Application Framework Investments

Managing IT for Value

Keep Your Options Open: Extreme Programming and Economics of Flexibility

Agile Economics

Extreme Programming and Economics of Flexibility

Agile Requirements for Management

Managing Requirements for Business Value

  Bruce Kogut's papers

Capabilities as Real Options

Using Real Options to Frame the IT Investment Problem

Strategic Options in the Digital Era

  Michel Benaroch

Managing Technology Investment Risk: A Real Options Perspective

Option-Based Management of Technology Investment Risk

  Real Options: Theory Meets Practice is a conference on Real Options, which contains many papers appropriate to IT. Here is a sample of some interesting papers from these conferences

Real Options and Enterprise technology project Selection and Deployment Strategies, Mark Jeffrey

Wireless Network Capacity Investment

Optimal Network Access Pricing for Natural Monopolies when Costs are Sunk and Revenue Uncertain

Real Options and Competitive Dynamics in Software Product Release

Valuation of Information Technology Investments as Real Options

The Option Approach to the New Product Development Process

  More Options papers from a variety of authors

Optimal R&D Investment Strategies Under the Threat of a Superior External Entry


A COTS Acquisition Process: Definition and Experience Report


The Role of Aggregation in the Measurement of IT-Related Organizational Innovation


A Case for using Real Options Pricing Analysis to Evaluate Information Technology Project Investments


Real Options Analysis is Entirely Appropriate for Evaluating Uncertain IT Investments


Valuation of Information Technology Investments as Real Options


How Option Thinking can Improve Software Platform Decisions


Evaluating IT Investments in Construction: Accounting for Strategic Flexibility


Combining Product Line Engineering with Options Thinking


Real Options and Strategic Decision–Making


Real Options, Real Opportunities


Poverty of Cost Models, the Wealth of Real Options


Real Options Overview


Real Options and Cost Models


Justifying Information Technology Investments: Balancing the Need for Speed of Action with Certainty Before Action

  CIRANO papers on Real Options

Value Creation, Risk Management and Real Options


Real Options, Preemption, and the Dynamics of Industry Investments


Monte Carlo Valuation of American Options through Computation of the Optimal Exercise Frontier

  Real Options and Markov Chains - Markov Stochastic process are a natural way to model real options based statistical processes

The Wiener-Hopf method with Applications to Finance, real Options, Insurance and Queuing Theory


Real Options with Incomplete Information and Multi–Dimensional Random Controls


Real Options with Monte Carlo Simulation


Introduction to Stochastic Optimization in Supply Chain and Logistics Optimization


Managing R&D Projects using Real Options Part I and Part II


Option Pricing using Variance Gamma Markov Chains

  Sites with Real Options Papers Sites

Real Options Selected Reading List

  Will Real Options Take Root: Why companies have been slow to adopt the valuation technique, Edward Teach, CFO Magazine, July 01, 2003

The McKinsey Quarterly's Real Options articles. Some of these require a subscription to the journal

"How Much is Flexibility Worth?"

"Making Real Options Real"

"The Real Power of Real Options"

"Making the Most of Uncertainty"


Real–Options.Com is a community site for financial managers, researchers, students, and other practitioners of real options. A reading list of books on Real Options

  Real Options Conference proceedings

The Real Options Group (ROG) site is maintained by a number of the top researchers in the field, among them Lenos Trigeorgis and Gordon Sick. It basically serves the purpose of advertising the consulting services of the ROG members and contains conference announcements with a corporate focus.
Real Options in Petroleum site emphasizes real option applications in the petroleum industry but also contains lots of general information on real options as well as an extensive collection of links.

  First Workshop on Economic-Driven Software Engineering Research, EDSER-1 May 17, 1999

Software Engineering Resource List for Software Economics. Hosted by the IIT Software Engineering Group of the Canadian Research Council.

  Real Options Resources hosted by Alexander Triantis which includes web links, searchable databases and loads of other RO materials

Laurent Gauthier's site on options in finance.

  Annotated Bibliography on Software Investment Analysis
  A Bibliography of Real Options Theory Applications In Software Engineering

Paul Tallon's reading list contains several books on real options theory and practice.

  Real Options papers at MIT
  Real Options Symposium held at the University of Maryland, April 2002


Some Books on Real Options and IT Decision Making


Real Options : Managerial Flexibility and Strategy in Resource Allocation by Lenos Trigeorgis


Real Options by Amram and Kulatilaka.


Investment Under Uncertainty by by Dixit and Pindyck.


The Innovator's Dilemma: When New Technologies Cause Great Firms to Fail by Christensen.


The Real Options Solution: Finding Total Value in a High-Risk World by Boer.


Value at Risk: The New Benchmark for Managing Financial Risk by Jorion.


Valuing R&D Projects through Real Options: Part I and Part II


Option-Based Management of Technology Investment Risk, Michael Benaroch who has many papers on options based decision process in information technology.

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