Response to Comments on Brandão et al. (2005)

In this note, we respond to Smith’s (2005) discussion of the approach outlined in our paper (Brandão et al. 2005) on using traditional decision analysis methods to solve real-options problems. Our response addresses several areas where we largely agree with Smith, but have different views on modeling preferences or on the practicality of implementing alternative modeling approaches. We view the issue raised by Smith on the estimation of process volatility to be a valid concern and propose a modification to our method to address this problem.