Short-term shocks, reversion, and long-term decision-making

Many observers claim that discounted cash-flow methods lead to a neglect of long-term and strategic decision-making. Using modern asset pricing methods, we examine one possible reason for this problem. If the cash-flows being discounted have an increasing dependence on an uncertain variable that tends to revert to a long-term equilibrium path in the face of short-term shocks, and if this reversion is ignored, then the uncertainty in the cash-flows will be overestimated. If this uncertainty causes risk discounting, then the amount of risk discounting that is appropriate will also be overestimated, which will tend to result in a relative undervaluation of long-term alternatives. We examine the implications of such an error for the comparative analysis of decision alternatives, including some involving an initial timing option. We use, as examples, decisions about production projects where the output price is the reverting variable.Where applicable, we look at two measures of what is meant by long-term: the operating duration of the project and the length of an initial timing option. For the projects without options, the analysis is based on the relatively straightforward "risk discounting effect" already mentioned. Reversion tends to decrease long-term uncertainty, and, with it, long-term risk discounting, which increases the relative value of long-term alternatives. Options complicate matters. The long-term decrease in uncertainty due to reversion tends directly to decrease long-term option values. Moreover, in addition to the original risk discounting effect and this "variance effect," there can be direct "future reversion effects" if the options involve a timing component or payoffs generated by cash-flows over a period of time. The overall influence can be a complicated mixture of the three different types of effects.We use this classification scheme to analyze two sets of examples: investment timing options on an instantaneous production project (equivalent to at-the-money American options on the project output price), and "now-or-never" options, as well as investment timing options, on projects that differ in their operating lives. We find that a neglect of reversion leads to an undervaluation of at- or in-the-money options on projects with longer operating lives. This is primarily due to the risk discounting effect. Longer timing options on the same project tend to be relatively overvalued by a neglect of reversion if the operating life of the project is moderately long, and undervalued if the project is instantaneous and currently at the money. The first is primarily due to variance and future-reversion effects. The second is primarily due to risk-discounting and future-reversion effects.Because parts of the economy may be influenced by short-term shocks in the presence of long-term equilibrium, these results suggest a reexamination of those aspects of analyses in the "real options" literature that depend on the use of non-reverting models.Supported by the Natural Science and Engineering Research Council of Canada, Imperial Oil University Research Grants, Interprovincial Pipeline Co., Saskoil, Exxon Corp., and the Social Science and Humanities Research Council of Canada, and by the Central Research Fund, a Nova Faculty Fellowship, the Muir Research Fund and the Institute for Financial Research of the University of Alberta, and by the Finance, Investment and Contracts Program of the MIT Center for Energy and Environmental Policy Research

A two-method solution to the investment timing option

Within the realm of derivative asset valuation, two types of methods are available for solving the investment timing option, each with a serious limitation for practical projects. Methods that use Monte Carlo simulation of risk-adjusted probability measures allow consideration of the complicated cash flow models typical of real projects, in the face of prespecified operating policies, but they do not provide an adequate way to determine what the optimal policy is. Formulation of the problem as an American option in the vein of Black-Scholes and Merton permits calculation of an optimal start policy, but only in situations with drastically simplified cash flow models. The solution to this dilemma is the development of an approach which applies the two methods in tandem. The rights to explore and develop an oil field are used as an example, and Monte Carlo simulation is used to calculate the value of these rights as a function of start time and contemporaneous oil price. This payoff function is then input to a Black-Scholes-Merton option calculation. The resulting optimal start policy is then reinserted to the Monte Carlo model for further analysis of project and individual cash-flow magnitudes and risks. Also, possible bias because of numerical-analysis errors are checked by direct search of start policies in the vicinity of the calculated optimum.Supported by the Social Science and Humanities Research Council of Canada, the Natural Science and Engineering Research Council of Canada, Imperial Oil and various research funds of the University of Alberta and the M.I.T. Center for Energy Policy Research

Project evaluation : a practical asset pricing method

This paper presents a practical approach to project evaluation using techniques of modern financial economics, with a sample application to oil development under a complex tax system. The method overcomes shortcomings of conventional DCF methods which are either imprecise about the relation between economic value and uncertainty, or are rigid and unrealistic in the required assumptions about how a project's risks (and therefore its value) are influenced by market conditions, the project physical structure, and tax and contract provisions. It is based on the formulation and estimation of an "information model" which represents the resolution over time of uncertainties underlying a project (oil prices in the examples shown). Oil prices are the underlying uncertainty in the examples shown. The project can then be valued using derivative asset valuation, which replicates the consequences of a complex asset by a traded portfolio of simpler assets (in our case, riskless bonds and future claims on oil). For ease of implementation, the method is designed to resemble current industry practice. The information model can be estimated using analysis and judgment similar to that applied in conventional evaluation. The formulation of decision alternatives, the selection of underlying uncertainties, and the design of a cash-flow model are the same as in standard DCF methods. Simulation and valuation results also can be represented in a familiar format. Restrictions must be placed on the "best" current asset pricing theory to achieve this convenient framework: the expected returns on the basic assets, which comprise the portfolios traded to replicate project cash flows, must be assumed to be known with certainty at the time of an evaluation.Supported by the MIT Center for Energy Policy Research, the Social Science and Humanities Research Council of Canada, the Natural Science and Engineering Research Council of Canada, the Imperial Oil University Research Grants Programme, the Central Research Fund, a Nova Faculty Fellowship, the Muir Research Fund and the Institute for Financial Research of the University of Alberta

Constructing employability as higher education practice – a reflective and reflexive account via an examination of my role as Director of the Centre for Excellence for Employability at Sheffield Hallam University, 2005-10

The theme of my context statement (CS) is ‘constructing employability as higher education (HE) practice’. The notion of ‘constructing’ is seen as pivotal. In 2005 employability was an emerging agenda in UK HE, one which many universities were deepening their engagement with. It was, however, a contested one, where scholarship and critique was expanding. For many who were sympathetic to the idea that universities should pay more attention to the notion of employability, a question often posed and encountered was: ‘what is it and how do you do it?’ This was the challenge for the Centre for Excellence for Employability (e3i) at Sheffield Hallam University between 2005-10, and for me in my role of Director of the Centre. In reflecting upon my experiences, and in reviewing my selected public works (PWs), I have found that my actions resulted in the construction of employability as a range of ideas, values, and a set of practices within the context of a specific academic and organisational culture. Employability, via my PWs, is formulated as social and cultural practice within a specific organisational and sectoral context. My roles of academic, educational developer, and Centre Director are explored reflectively and reflexively to re-construct my identity and agency as one of Academic Development Leader. My understanding is that educational developers and academic leaders in universities operate within the complex spaces and discourses constituted by the values and practices of academics as members of disciplinary subject communities, the processes of institutional strategic management, managerial decision-making and formal governance regimes. My reflection upon my PWs has created both a perspective on how to create and embed employability as a learning experience/learning outcome within a HE context, and also a re-appraisal of my identity and agency as an Academic Development Leader, with associated implications for my ongoing practice

Dynamical replica theoretic analysis of CDMA detection dynamics

We investigate the detection dynamics of the Gibbs sampler for code-division multiple access (CDMA) multiuser detection. Our approach is based upon dynamical replica theory which allows an analytic approximation to the dynamics. We use this tool to investigate the basins of attraction when phase coexistence occurs and examine its efficacy via comparison with Monte Carlo simulations.Comment: 18 pages, 2 figure

Relaxation and Metastability in the RandomWalkSAT search procedure

An analysis of the average properties of a local search resolution procedure for the satisfaction of random Boolean constraints is presented. Depending on the ratio alpha of constraints per variable, resolution takes a time T_res growing linearly (T_res \sim tau(alpha) N, alpha < alpha_d) or exponentially (T_res \sim exp(N zeta(alpha)), alpha > alpha_d) with the size N of the instance. The relaxation time tau(alpha) in the linear phase is calculated through a systematic expansion scheme based on a quantum formulation of the evolution operator. For alpha > alpha_d, the system is trapped in some metastable state, and resolution occurs from escape from this state through crossing of a large barrier. An annealed calculation of the height zeta(alpha) of this barrier is proposed. The polynomial/exponentiel cross-over alpha_d is not related to the onset of clustering among solutions.Comment: 23 pages, 11 figures. A mistake in sec. IV.B has been correcte

IRIS Guidelines: Early Intervention in Psychosis IRIS Guidelines Update September 2012

Revision of the original 1998 IRIS Guidelines

An initial event in insect innate immune response: structural and biological studies of interactions between β-1,3-glucan and the N-terminal domain of β-1,3-glucan recognition protein

In response to invading microorganisms, insect β-1,3-glucan recognition protein (βGRP), a soluble receptor in the hemolymph, binds to the surfaces of bacteria and fungi and activates serine protease cascades that promote destruction of pathogens by means of melanization or expression of antimicrobial peptides. Here we report on the NMR solution structure of the N-terminal domain of βGRP (N-βGRP) from Indian meal moth (Plodia interpunctella), which is sufficient to activate the prophenoloxidase (proPO) pathway resulting in melanin formation. NMR and isothermal calorimetric titrations of N-βGRP with laminarihexaose, a glucose hexamer containing β-1,3 links, suggest a weak binding of the ligand. However, addition of laminarin, a glucose polysaccharide (~ 6 kDa) containing β-1,3 and β-1,6 links that activates the proPO pathway, to N-βGRP results in the loss of NMR cross-peaks from the backbone 15N-1H groups of the protein, suggesting the formation of a large complex. Analytical ultra centrifugation (AUC) studies of formation of N-βGRP:laminarin complex show that ligand-binding induces sel-fassociation of the protein:carbohydrate complex into a macro structure, likely containing six protein and three laminarin molecules (~ 102 kDa). The macro complex is quite stable, as it does not undergo dissociation upon dilution to sub-micromolar concentrations. The structural model thus derived from the present studies for N-βGRP:laminarin complex in solution differs from the one in which a single N-βGRP molecule has been proposed to bind to a triple helical form of laminarin on the basis of an X-ray crystallographic structure of N-βGRP:laminarihexaose complex [Kanagawa, M., Satoh, T., Ikeda, A., Adachi, Y., Ohno, N., and Yamaguchi, Y. (2011) J. Biol. Chem. 286, 29158-29165]. AUC studies and phenoloxidase activation measurements carried out with the designed mutants of N-βGRP indicate that electrostatic interactions involving Asp45, Arg54, and Asp68 between the ligand-bound protein molecules contribute in part to the stability of N-βGRP:laminarin macro complex and that a decreased stability is accompanied by a reduced activation of the proPO pathway. Increased β-1,6 branching in laminarin also results in destabilization of the macro complex. These novel findings suggest that ligand-induced self-association of βGRP:β-1,3-glucan complex may form a platform on a microbial surface for recruitment of downstream proteases, as a means of amplification of the initial signal of pathogen recognition for the activation of the proPO pathway