Research

Real Options in System Design

Although designers often promote the idea of flexibility, explicit consideration of flexibility in system design represents a considerable departure from current engineering practice. The rationale for flexibility in design is that, due to uncertainty, there is value in having “the right, but not the obligation,” in other words, an option, to react to future developments.

This research focuses on the development of valuable flexibility in designs. Conceptually and professionally, this work lies midway between standard engineering (which does not consider design flexibility in any detail) and financial real options analysis (which does not look at design). ESD’s research team has developed a “screening model” approach to the core problem of identifying the system elements that should be flexible in order to increase value. Screening models are mid-fidelity models that run much faster than standard detailed design models. They can be used to examine the performance of many designs across great ranges of scenarios, thus pinpointing system architectures that are the most attractive prospects for detailed design

Proper inclusion of flexibility in system design can increase the expected value of projects by over 25%. ESD researchers work closely with industries ranging from aerospace and satellite communications, to automotive and energy, to health care, construction, and real estate to identify opportunities for flexible designs.

Applications of the Integrated Screening Model to Oil and Gas Field Development

Evaluation of the value of flexibility in the design of upstream oil and gas exploration facilities begins with establishing a deterministic baseline design (1), followed by evaluation of the design under uncertainty (2), response under uncertainty with facility-level flexibility (3) and response with increasingly sophisticated flexibility strategies such as the tie-in of new fields over time (4). Courtesy of Professor Richard de Neufville