New Investment Decision-Making Tool that Combines a Fuzzy Inference System with Real Option Analysis

Abstract

This paper proposes a new procedure for enriching investment and real option analysis performed with the fuzzy pay-off method by decomposing the pay-off distribution into multiple sub-distributions that correspond to different investment scenarios. This creates more information about the importance of the effect of selected factors to investment profitability. Furthermore, based on the proposed procedure, we show how a fuzzy inference system to support investment decision-making can be constructed. The proposed new procedure and the application of a fuzzy inference system are illustrated with a numerical case analysis of a power generation investment. The results show that the proposed new procedure reveals actionable information about the analyzed investment that may otherwise remain uncovered and enhances the decision-making ability of investment managers. The application of a fuzzy inference system to investment decision-support and real option analysis is a rather new approach. The obtained results highlight how the construct of a fuzzy inference system must be adapted to the perspective of the application for which it is used.