I address the interaction between accounting conservatism and real options in both a staged investment and abandonment model. An accounting policy biased towards classifying a Good (Bad) project as Bad (Good) is conservative (aggressive). The accounting signal is optimally conservative when the ex ante unconditional expected terminal value is less than the second investment (staged investment) ...

Real option valuation has traditionally been concerned with investment under project value uncertainty while assuming the agent has perfect confidence in a specific model. However, agents do not generally have perfect confidence in their model and this model uncertainty affects their decisions. In this work, we introduce a simple model for real option valuation to account for the agent’s aversi...

Existing project performance measures in the infrastructure sector focus on construction (time, cost, quality) and pay less attention to lifecycle performance. The consequence of this shortsighted perspective is that decisions taken early lead poorer solutions. Infrastructure should last centuries quickly becomes inadequate, leading costly reconfigurations. Real options reasoning can help manag...