Investment in long-lived transport infrastructure such as roads, railways or ports is subject to uncertainty, especially on the demand side. Failure to manage uncertainty can result in costly mistakes in either direction: white elephants or unacceptable levels of congestion. The real options approach helps deal with this problem.
The real options approach deals with the uncertainty problem by preserving the option to construct something that turns out to be needed, while avoiding most of the cost of constructing something that turns out to be a white elephant. It works by building flexibility into the investment decision making process, so that it is possible to change course as new information comes in.
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