The use of real options in optimum flood risk management decision making

Woodward, M. and Gouldby, B.P. and Kapelan, Z. and Khu, S. and Townend, I. (2010) The use of real options in optimum flood risk management decision making. In: 1st European IAHR Congress, 4 – 6 May 2010, Edinburgh, UK.

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Abstract

Making decisions regarding the most appropriate long term flood risk related intervention investments is complex. The complexity of the decisions primarily relates to the evolving nature of flood risk, with particular regard to global climate change but also future socio economic development scenarios. Methods are required that are capable of analysing intervention options in a rational manner, taking account of future uncertainties. Real Options is a recognised approach for facilitating adaptive strategies. It enables the value of flexibility to be explicitly included within the decision making process. In the context of flood risk management, where climate change is influential but uncertain, Real Options offers a practical yet powerful approach that can be used to assist decision makers. A computational framework is under development which will have the capability to assess the most appropriate set of interventions to make in a flood system and the opportune time to make these interventions, given the future uncertainties. This framework captures the concepts of real options to evaluate potential flood risk management opportunities across a range of future climate change and socio economic scenarios. Preliminary aspects of the framework have been applied to a small section of the Thames Estuary, and initial results show that the method allows suitable inclusion and evaluation of different flood defence options previously deemed uneconomical.

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