Using Real Options Analysis for Evaluating Uncertain Investments in Information Technology: Insights from the ICIS 2001 Debate

Business and information systems (IS) executives continue to grapple with issues of risk and uncertainty in evaluating investments in information technology (IT). Despite the use of net present value (NPV) and other investment appraisal techniques, executives are often forced to rely on instinct when finalizing IT investment decisions. Recognizing the shortcomings of NPV, real options analysis has been suggested as an alternative approach, one that considers the risks associated with an investment while recognizing the ability of corporations to defer an investment until a later period or to make a partial investment instead. Responding to a growing interest in real options analysis among the IS community, a debate involving four prominent researchers was convened at the 2001 International Conference on Information Systems (ICIS). In addition to offering a tutorial overview of real options, the goal of the debate was to assess the state of research in this area and to identify avenues for future Communications of the Association for Information Systems (Volume 9, 2002) 136-167 137 Using Real Options Analysis for Evaluating Uncertain Investments in Information Technology by P.P. Tallon, R.J. Kauffman, H.C. Lucas, A.B. Winston, and K. Zhu research. This paper describes the outcomes of the debate, culminating in a series of research questions and topics that set the stage for future research in IT and real options analysis. A transcript of the debate and an overview of real options analysis are included as appendices.