Optimal regime switching under risk aversion and uncertainty

echnology adoption is key for corporate strategy, often determining the success or failure of a company as a whole. However, risk aversion often raises the reluctance to make a timely technology switch, particularly when this entails the abandonment of an existing market regime and entry in a new one. Consequently, which strategy is most suitable and the optimal timing of regime switch depends not only on market factors, such as the definition of the market regimes, as well as economic and technological uncertainty, but also on attitudes towards risk. Therefore, we develop a utility-based, regime-switching framework for evaluating different technology-adoption strategies under price and technological uncertainty. We assume that a decisionmaker may invest in each technology that becomes available (compulsive) or delay investment until a new technology arrives and then invest in either the older (laggard) or the newer technology (leapfrog). Our results indicate that, if market regimes are asymmetric, then greater risk aversion and price uncertainty in a new regime may accelerate regime switching. In addition, the feasibility of a laggard strategy decreases (increases) as price uncertainty in an existing (new) regime increases. Finally, although risk aversion typically favours a compulsive and a laggard strategy, a leapfrog strategy may be feasible under risk aversion provided that the output price and the rate of innovation are sufficiently high

Opções Reais como ferramenta de inovação para os Trabalhos de Auditoria Interna de TI / Real Options as an Innovation tool for Internal IT Audit Works

O estudo propõe uma abordagem direcionada à Teoria das Opções Reais aplicada em trabalhos de Auditoria Interna de TI de uma instituição financeira, visando resolver o problema de como melhorar a rentabilidade dos trabalhos de auditoria de TI. Este estudo é classificado como pesquisa aplicada, enquadrada como do tipo exploratória, com abordagem qualitativa, utilizando a Teoria do Enfoque Meta Analítico Consolidado para emoldurar artigos relevantes relacionados ao tema. O objetivo do estudo é analisar a aplicabilidade da Teoria das Opções Reais na Auditoria Interna de TI, com intuito de otimizar ganhos operacionais. O resultado do artigo demonstra o cenário estudado; a modelagem da aplicação da teoria das opções reais e um modelo sintetizado para aplicação da TOR em trabalhos de auditoria interna de TI. A proposta de modelo foi validada com os especialistas que atuam na auditoria, com intuito de coletar os feedbacks para o seu aperfeiçoamento. Por fim, foram propostas ações a serem implementadas, como a aplicação do modelo em demais projetos da instituição financeira. Pretende-se que os resultados sejam úteis para adequação e atualização da gestão de trabalhos de auditoria nas organizações

Rescaling-contraction with a lower cost technology when revenue declines

YesA mature oil field rescaled contraction describes a switch to a technological alternative more appropriate for the depleted state of an underlying resource. Off-shore oil rigs are an illustration, since the original technological scale designed for very large output flows becomes inappropriate as the operational efficiency declines later in life and facing a dwindling output flow, so a more appropriate extraction technology becomes economic. A real option representation is formulated on a stochastic oil price and deteriorating output volume. We consider investment/divestment decisions both separately, and jointly, which have different implications for government policies and also option values. The resulting model yields analytical (or semi-analytical) results indicating that immediate switching to the lower cost technology could sometimes be hastened as the price volatility increases, depending on the current revenue, if divestment and switching are considered jointly. However, greater volatility could also promote hysteresis

Investment and land-use decision under consideration of uncertainty

Investment and land use decisions pre-determine the distribution of other farm resources and thus constitute core farm activities. Investments at the farm level often include sunk costs, risks, returns-to-scale, investment options of predefined sizes, and multiple stages of investment. Considering these factors is crucial for improving understanding of the economic incentives and disincentives to invest at the farm level and appropriate design of related policy. However, existing numerical methods of investment analysis fail to capture all the listed factors simultaneously due to explicit or implicit restrictions. This thesis narrows this methodological gap by developing a numerical method to analyze investment options at the farm level. The method is applied to decision making with regard to investing in a perennial energy crop production system—short-rotation coppice (SRC)—on a representative farm in Germany. The investment option implies all of the attributes listed above. Furthermore, empirical analysis of SRC adoption exclusively for biomass production is relevant in light of increasing renewable energy demand. SRC is characterized by multiple environmental benefits relative to other forms of agriculture and offers a more efficient energy generation option compared to annual bioenergy crops. For a farmer, SRC is advantageous due to low input requirements, potential natural hedging, and broad political support. In addition, timing of SRC biomass production is not predetermined and to some extent flexible, such that there is potential to adjust any decision based on how future conditions evolve. Yet, farmers in the European Union have been reluctant to adopt SRC and the literature provides no clear explanation. The empirical aim of this research is hence to quantify the economic incentives and disincentives for German farmers to adopt SRC under consideration of risk levels and preferences, and to provide relevant policy recommendations. To simulate SRC introduction at the farm level, I design a stochastic-dynamic model and develop a novel solution approach that combines Monte Carlo simulation, scenario tree reduction, and stochastic programming. A scenario tree reduction technique uses draws obtained with Monte Carlo simulation and outputs a scenario tree, which is then combined with a farm-level model. Restrictive assumptions commonly made in the literature are relaxed. In particular, a farmer can either decide to introduce SRC immediately or else postpone the decision; also, coppicing intervals and the total lifetime of SRC plantation are flexible. Potential adoption of SRC is formulated as an American compound option, where planting, each coppicing or biomass harvest, and final reconversion back to annual crop production are stages of the compound option. SRC competes for limited farm resources with annual crop production, while returns from both SRC and annual crops are stochastic. The outcome hence includes not only optimal timing, but also optimal scale of SRC introduction. Risk aversion is introduced using the concept of stochastic dominance. The method developed and demonstrated here is transparent, allows relaxing assumptions, and does not hamper computational capacity. It is a rather general instrument for the analysis of long-term investment options under conditions of uncertainty and risk preferences, and hence is of interest far beyond the specific context described in this case study. Empirical results demonstrate that SRC cannot compete with annual crop production under current market conditions and that individual farmers wait for a certain trigger or state-of-nature in order to adopt SRC. A risk-averse farmer might decide to introduce SRC earlier, though at a smaller scale, in order to take advantage of the potential natural hedging effect. The results indicate that some level of risk is associated with increased SRC introduction due to the benefits associated with the managerial flexibility inherent to SRC cultivation. In particular, flexible timing with respect to establishment, coppicing, and final reconversion allows farmers to exploit positive risks and mitigate negative ones. In this regard, policy instruments intended to reduce or eliminate risk associated with SRC cultivation were found to be inefficient. In contrast, currently implemented policies that help reduce the sunk costs and opportunity costs of SRC introduction are more efficient at promoting adoption, although the results suggest that such instruments need to be modified in order to be more effective, because otherwise farmers are more likely to postpone making decisions about SRC introduction. The empirical results of the ex-ante analysis conducted here should serve as a basis for higher level analyses and related policy recommendations

Factors Influencing Small Construction Businesses from Implementing Information Security: A Case Study

This qualitative study described the influence of small businesses’ failure to properly implement information security technologies resulting in the loss of sensitive and proprietary business information. A collective case study approach was used to determine the most effective way to gain a holistic picture of how small construction businesses make security technology implementation decisions to support their workforce. The theory guiding this study was the Unified Theory of Acceptance and Use of Technology (UTAUT) model which is related to the Theory of Planned Behavior and the Technology Acceptance Model which helped explain the intentions of individuals to use information systems. Security policies and threats (insider and cyber) were also looked at during this study. Data collection methods included questionnaires, interviews, document reviews, journaling, and webpage scans to provide insight into security information technology use. The results of this study indicated small construction businesses rely heavily on third-party information technology venders to perform security functions. This security model has led to several of the businesses experiencing cyber security incidents and the businesses being more reactive in responding to cyber-attacks. Deficiencies with planning for system implementations also impacted how employees thought and used the businesses’ security information systems. The study’s results indicated employee’s behavior intention and use behavior was highly impacted by the age moderator with older employees more likely to display a lower behavior intention and use behavior for using systems