Measuring Risk under Uncertainty and Competition, Game Theotetical Approach to Real Option Valuation

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Iwate Prefectural Uniyersity, Depattment of Policy Studies, Assistant Professor The purpose of the research was to develop a valuation model of firms' projects under uncertainty and competition, incorporating the real option approach to game theory. The real option approach can take the value of flexibility embedded in the real investment into account while the game theory can analyze the effect of rival firms' behavior and derive the equilibrium strategy in the presence of the competition.We first extended the two-stage model, which was developed in our previous research, to a multi-stage decision model when the sequential and simultaneous games were considered that leads to the following two papers.A Numerical Approach for Real Option Values and Equilibrium Strategies in a DuopolyThe Investment Game under Uncertainty : An Analysis of Equilibrium Values in the Presence of First or Second Mover AdvantageWe also examine a flexibility trap which represents a phenomenon where a player who … More has an option to invest lose her advantage just because she has the flexibility though the option always increases the value of the investment for the firm if the competition is not considered . We published a paper.Real option and flexibility trap under competition(written in Japanese)in which the equilibrium selection theory is used to lead the unique outcome corresponding to a flexibility trap. Our research contribution has presented in many places that includes four years consecutive presentations at Annual Real Options Conference held all over the world. Furthermore, the head investigator organized workshops in 2005(Workshop on Measuring Risk under a competitive environment at Iwate Prefectural University)and in 2006(Workshop on Real Options and Game Theory at Chuo University)where all the members of this project talked each research contribution, respectively.The investigators of this research helped establish a new academic society The Japan Association of Real Options and Strategy(JAROS), which was established in 2006. They are now leading members of the association who also join the management of the committee. Less