software economics; decision-making; real options; real options analysis; uncertainty; investment analysis; financial valuation; risk; prise de décisions; options réelles; analyse des options réelles; incertitude; analyse des investissements; évaluation financière; risque
Risk, or exposure to uncertainty, is an inherent part of software development. It is therefore an important factor in software investment decisions. This paper presents a disciplined approach to treating technology risk-an approach that allows software development decisions to be linked to the financial markets in some instances. The approach relies on the premise that uncertainty creates value when managed properly. The paper demonstrates the utility of securities in estimating the systematic component of technological uncertainty underlying a software development investment. It accomplishes this through a familiar development scenario that is subject to the uncertainty of a particular software technology: Java. The estimate of the underlying risk helps determine the value of the scenario. The valuation is performed through real options analysis, a technique well suited to deal with investment decisions under uncertainty in the presence of future discretionary actions. This kind of analysis is likewise applicable when Java is substituted by another software technology, such as the Extensible Markup Language (XML).