Multiple-shot robust decision making (e.g. adaptation pathways)

The adaptation pathways approach implements the criterion of flexibility by characterizing alternative strategies in terms of two attributes: i) adaptation tipping points (ATP), which are points beyond which strategies are no longer effective , and ii) what alternative strategies are available once a tipping point has been reached. Importantly, the exact time when an ATP is reached does not matter, it is rather the flexibility of having alternative strategies available that drives the decision. Prominent applications of this approach include the Thames Estuary 2100 Plan, the Dutch Delta Programme and the New York City Panel on Climate Change.
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AP interactive decision tree - click any node to select it

In some decision problems, an important consideration is the extent to which new information will reduce current uncertainty. A method that addresses this situation is called real-option analysis. Real-option analysis takes into account measures created or destroyed by pursuing given option. The method allows for the consideration of the benefits of keeping options open. In this sense, real option analysis is an extended net present value calculation, because it calculates not only the direct benefits of a measure, but also the benefits that may accrue in the future given climate change impacts and the ability, kept open by the measure, to adapt in the future. Consider the case of building a sea wall, and it is not known whether the expected level of sea level rise over the lifetime of the wall will be 50 or 100 centimetres, but it is expected that scientific study currently under way will reveal the correct answer within the next five years. One response might be to wait for this information before committing to a seawall of a particular height. At the same time, however, there may be a cost to waiting, because it will expose communities to a higher level of risk during that time. Calculating the cost of waiting is fairly easy, but calculating the benefits, essentially the value of leaving options open, can be more difficult. The practice of valuing options extends the furthest in financial markets, where analysts use a number of models, which relies on particular assumptions about market price movements and volatility. For other types of investments, such as adaptation projects, modelling the value of waiting can proceed on a more ad-hoc basis, as described in the case of the sea-wall (see Patt 2011).


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Real option analysis

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Real options analysis
Case steps (Europe)

Case study steps identified for task 'Multiple-shot robust decision making (e.g. adaptation pathways)'.

WE1 - Wadden sea
Appraise decisions: What are promising strategic options to adapt to climate change?
WE2 - Turning point analysis of Rhine river policies
Appraising options: What adaptation options should be chosen?

This section is based on the UNEP PROVIA guidance document

Criteria checklist

1. You want to appraise adaptation options.
2. The focus is either on collective actions and there are no conflicting interests of private actors, or the focus is on individual collective actions.
3. Decisions can be formalised.
4. The set of options does not only include short term ones.
5. Residual impact projection has been addressed.
6. Valuation has been addressed.
7. The set of options includes at least one flexible option.
Training material