Summer school

Assessing Economic Policies Using the Real Options Methodology - 3 ECTS

Irreversible effects do play an important role in private as well as public decision making. The basis for the Precautionary Principle, an important principle in environmental policy, is uncertainty about irreversible costs of particular actions (e.g. the release of GMOs).
This course will address the issue of irreversibility from an economic point of view. Different approaches dealing with irreversibilities have emerged in the economic literature. The two most prominent once are the quasi option and real option value theory. Application of both approaches requires technical skills most students find difficult.

Organised by Wageningen School of Social Sciences (WASS)

Mon 17 August 2020 until Fri 21 August 2020

Venue Leeuwenborch, gebouwnummer 201
Hollandseweg 1
6706 KN Wageningen

    Contact person (Content): Justus Wesseler

    Contact person (Logistics): Marcella Haan

      Course Registration

        The objective of the course is to introduce the origins of the quasi option value and real option values, to teach the methods most commonly used (discrete methods such as decision trees; continuous time, continuous state models using stochastic processes; Itó calculus), and to discuss and practice various applications including non-renewable resource use, technology adoption, climate change, forestry, and food- and bio-safety.

        The course will include two parts. One week of lectures and exercises with assignments and a course paper. For passing the course students need to participate in lectures and exercises (min. 90%) and submit the course paper within six month after the course.

        Learning outcomes

        After successful completion participants are expected to be able to:

        • know the economic implications and relevance of the irreversibility effect;
        • understand economic papers that apply real option models;
        • apply discrete time discrete state models for decision under uncertainty and irreversibility;
        • know the steps from discrete time, discrete state to continuous time, continuous state models;
        • develop real option models and analyse the results using numerical simulation methods.

          Course activities

          • lectures (25%) on the skills needed;
          • practicals (25%) deepening the skills obtained,
          • course paper (50%) applying the skills obtained

            Target group

            PhD candidates. Min. 10 participants, Max: 25 participants

            Assumed prior knowledge

            Good micro-economic knowledge and in particular calculus (derivatives, integrals), basic knowledge in stochastic processes and differential equations is an advantage.


            Course paper between 10 and 20 pages.

            Schedule of the course

            Monday Tuesday Wednesday Thursday Friday
            09.00-10.30 Introduction - course overview - assignments - grading - review discounting and integrals (Silke Hüttel, Justus Wesseler, Jinhua Zhao) Comparing Financial, Quasi and Real Option Values (AF, Henry, DP) (Justus Wesseler) McDonald and Siegel Models (Jinhua Zhao) Entry, Exit, and Hysteresis. Discrete State (Justus Wesseler) Numerical Solutions (Jinhua Zhao)
            10.30-10.45 Coffee break Coffee break Coffee break Coffee break Coffee break
            10.45-12.15 Pricing of Financial Options: discrete time, discrete state, including exercises (Justus Wesseler) Additional Applications and Practicals (Kutay Cingiz, Justus Wesseler) Applications and Exercises McDonald and Siegel Model. Comparative Static Exercises (Silke Hüttel) Entry, Exit, and Hysteresis. Discrete State. Exercises (Justus Wesseler) Exercises: Numerical Solutions (Kutay Cingiz, Jinhua Zhao)
            12.15-13.30 Lunch break Lunch break Lunch break Lunch break Lunch break
            13.30-15.00 Quasi and Real Option Value (Jinhua Zhao) Continuous State Stochastic process, lto-calculus (Jinhua Zhao) Applications and Exercises: McDonald and Siegel Models - Sugar Beet Paper (Kutay Cingiz, Justus Wesseler) Entry, Exit, and Hysteresis. Continuous time and state (Jinhua Zhao) Applications and Exercises (Silke Hüttel)
            15.00-15.30 Coffee break Coffee break Coffee break Coffee break Coffee break
            15.30-17.00 Exercises: discrete time and state. Arrow/Fisher example (Kutay Cingiz) Exercises practising lto-process. Simulating Brownian motion, estimating processes (Silke Hüttel) Applications and Exercises: McDonald and Siegel Models - Sugar Beet Paper, (Kutay Cingiz, Justus Wesseler) Exercises: Entry, Exit, and Hysteresis. Continuous time and state. (Cingiz Kutay, Jinhua Zhao) Applications and Exercises (Silke Hüttel)
            Course evaluation (Justus Wesseler, Jinhua Zhao, Kutay Cingiz, Silke Hüttel)

            Course fees

            WASS, PE&RC and WIMEK/SENSE PhDs with TSP € 250
            Other PhDs, postdocs and academic staff € 500
            All others € 750

            The course fee does includes additional training material, coffee / tea, lunches and an informal dinner.

            Cancellation conditions:

            The participants can cancel their registration free of charge 1 month before the course starts. A cancellation fee of 100% applies if a participant cancels his/her registration less than 1 month prior to the start of the course.

            The organisers have the right to cancel the course no later than one month before the planned course start date in the case that the number of registrations does not reach the minimum.

            The participants will be notified of any changes at their e-mail addresses.