IT project selection model using real option optimization with fuzzy set approach

Abstract

Optimal selection of interdependent IT projects for funding in multi period has been challenging in the framework of Real Option analysis. This paper presents a mathematical model to optimize the fuzzy Option value for multi-stage portfolio of IT projects. A fuzzy Option model is used to maximize the Option value of each IT project. The IT portfolio selection problem is formulated as a fuzzy zero-one integer programming model that can handle both uncertain and flexible parameters to determine the optimal project portfolio. The idea of optimizing the fuzzy real option value of the portfolio is to maximize the overall value and to minimize the downside risk of the selected portfolio for funding. A transformation method based on qualitative possibility theory is developed to convert the fuzzy portfolio selection model into a crisp mathematical model from the risk-averse perspective. The transformed model can be solved by an optimization technique .The optimization model and solution approach can help IT managers in optimal funding decision making for projects prioritization. © 2011 Springer-Verlag.