Optimal Timing of the Seismic Vulnerability Reduction Measures Using Real Options Analysis

Abstract

The uninterrupted performance of the infrastructure systems of a community is essential to its welfare and prosperity. Infrastructure assets are continuously subject to degradation, which can compromise their performance and increase their seismic vulnerability. Measures such as seismic retrofits should be adopted to ensure the uninterrupted performance of infrastructure assets. Proper timing of these interventions can reduce the total costs incurred by the communities. To this end, an appropriate investment valuation method is needed. This study proposes an investment valuation framework that addresses this need. At the core of this framework is a real options model that determines the optimal time to implement seismic vulnerability reduction measures considering various uncertainties about the state of the asset, the probable future hazards, and the costs incurred by the community. The main contribution of this study to the body of knowledge is the creation of a framework based on real options analysis (ROA) that is tailored to the context of investment decision-making and timing of seismic vulnerability reduction measures. Practitioners can use this framework to plan the implementation of seismic vulnerability reduction measures, avoid over- or underinvestment in these interventions, enhance their flexibility in using limited available financial resources, and achieve resilience enhancement objectives.