Managing Operational Uncertainty with Real Options

The operation of a complex system in a high stakes environment can lead to unacceptable levels of risk. The unintended consequences of system failure or under-performance make it imperative to understand and manage operational uncertainty during the design phase. In order to manage operational uncertainty, this paper presents the application of real options analysis in design. Our approach first identifies beneficial insertion points in the original design for mechanisms that add operational flexibility. We then use a binomial lattice options pricing model to value one or more options in the context of possible operational scenarios and outcomes. Finally, if the benefit of an option is greater than its additional cost, our approach will recommend the option. We present a hypothetical design example that finds a positive value for the addition of a flexible battery pack that can be deployed with a large micro air vehicle (MAV) fleet.