Response to Comments on Brandão et al. (2005)

Authors:
Luiz E. Brandão;James S. Dyer;Warren J. Hahn
Affiliations:
IAG Business School, Pontifícia Universidade Católica do Rio de Janeiro, Rio de Janeiro, RJ 22453-900, Brazil;McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712;McCombs School of Business, The University of Texas at Austin, Austin, Texas 78712
Venue:
Decision Analysis
Year:
2005

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Abstract

In this note, we respond to Smithâ聙聶s (2005) discussion of the approach outlined in our paper (Brandão et al. 2005) on using traditional decision analysis methods to solve real-options problems. Our response addresses several areas where we largely agree with Smith, but have different views on modeling preferences or on the practicality of implementing alternative modeling approaches. We view the issue raised by Smith on the estimation of process volatility to be a valid concern and propose a modification to our method to address this problem.