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Managerial decision-making in hospitals with real options analysis

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Abstract

We present the application of real options analysis (ROA) to a managerial decision-making problem. A case study was developed to illustrate the mathematical steps required to apply ROA. The results of this model show that a net present value analysis, which is most often used in practice, would have led to a sub-optimal decision, as it does not take into account the value of future options and managerial flexibility. Hospitals rarely use quantitative methods like ROA to address their managerial decision-making problems. Usually, simple cost-benefit analysis and subjective assessment are used instead of sophisticated analysis methods and objective data. This paper aims to show the capabilities of ROA and provides details on how to apply it in practice. We discuss the kind of data that is needed to carry out the analysis and how ROA can be integrated into the organizational decision process. To do this, we propose a data-to-decision (D2D) framework. The D2D framework consists of two components: data-to-information (D2I) and information-to-decisions (I2D). D2I suggests the use of quantitative methods, such as ROA, to extract decision-relevant information from data. Based on the generated information, the second component, I2D, supports executives in selecting the best course of action given multiple organizational objectives.

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Acknowledgments

The authors would like to thank the editors and the three anonymous referees for handling this paper and for providing constructive comments and improvement suggestions. This research has been funded in part by NSF grant CMMI-1335407 and by the Virginia Tech Institute of Critical Technology and Applied Science (ICTAS) grant JFC-11-130.

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Authors and Affiliations

  1. Grado Department of Industrial and Systems Engineering, Virginia Tech, 205 Durham Hall, Blacksburg, VA, 24061, USA

    Christian Wernz

  2. Department of Economics and Business Engineering, Karlsruhe Institute of Technology, Kaiserstrasse 12, 76131, Karlsruhe, Germany

    Inga Gehrke

  3. Department of Management and Decision Sciences, Leon Hess Business School, Monmouth University, 400 Cedar Avenue, West Long Branch, NJ, 07764, USA

    Daniel R. Ball

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  1. Christian Wernz
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  2. Inga Gehrke
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  3. Daniel R. Ball
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Correspondence to Christian Wernz.

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Wernz, C., Gehrke, I. & Ball, D.R. Managerial decision-making in hospitals with real options analysis. Inf Syst E-Bus Manage 13, 673–691 (2015). https://doi.org/10.1007/s10257-013-0230-3

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  • DOI: https://doi.org/10.1007/s10257-013-0230-3

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