Comparative Analysis of the Datar-Mathews Real Options Method and Simulation Decomposition for Strategic Environmental Decision-Making

Abstract

Incorporating uncertainty into environmental evaluations improves decision-making and methods taken from various disciplines have been used to support this task. This paper contrasts the performance of two distinct approaches: the Datar-Mathews method pertains to real options valuation inherited directly from finance theory, while Simulation Decomposition (SimDec) has its origins in global sensitivity analysis. The two methods provoke different research questions, different modeling resolutions, and supply different analytics. Our analysis suggests that global sensitivity analysis should be used in the exploration and project planning stages, while real options are more useful for explicitly pricing tasks.

Keywords: investment appraisal, cost-benefit analysis, techno-economic assessment, decision-making support, global sensitivity analysis, real options, SimDec