Publication Type

Journal Article

Version

acceptedVersion

Publication Date

6-2015

Abstract

Innovations involving information technology (IT) provide potentially valuable investment opportunities for industry and government organizations. Significant uncertainties are associated with decision-making for IT investment though, a problem that senior executives have been concerned about for a long time. The uncertainties include consumer, market and regulatory responses, IT-driven changes in operational and transactional performance, technology standards and competition, and future market conditions. All these things have an impact on organizations’ willingness to adopt. As a result, traditional capital budgeting, investment experience, and intuition have not been very effective in IT investment decision-making. We propose a new option-based stochastic valuation modeling approach for IT investment under uncertainty that incorporates a mean reversion process to capture cost and benefit flow variations over time. We apply the proposed approach in two industry settings: to a largescale IT investment in the consolidation of data marts at a major airline, and to a mobile payment system infrastructure investment on the part of a start-up. The applications supported the evaluation of the proposed methods, and offered some illustrations about the kinds of managerial insights that can be obtained. We also report on several extensions that demonstrate how the creation of useful management findings from the modeling approach can be supplemented with project value sensitivity analysis and the use of simulation-based least-squares Monte Carlo valuation. The findings are useful to assess the power and value of the approach.

Keywords

Decision-making under uncertainty, Economic analysis, IT investment, Mean reversion, process Mobile payments, Real option analysis, Technology valuation

Discipline

Computer Sciences | Management Information Systems | Technology and Innovation

Research Areas

Information Systems and Management

Publication

Information Technology and Management

Volume

16

Issue

2

First Page

153

Last Page

172

ISSN

1385-951X

Identifier

10.1007/s10799-014-0212-2

Publisher

Springer

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1007/s10799-014-0212-2

Download

Share

COinS