Evaluating Alternative Operations Strategies to Improve Travel Time Reliability (2013) / Chapter Skim
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Pages 136-144
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From page 136... ...
136 Valuing Reliability for Rare Events In this appendix, options theory from financial economics is again applied to the problem of unreliability, this time in the context of rare events and the decision to invest given a low-probability but high-consequence event. Some events that influence the performance of the highway network are considered to be rare events.
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137 s determines the spread of the distribution. The shape parameter x controls the shape of the distribution -- in particular, the tail behavior of the distribution.
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138 a relatively short interval. For example, this might apply to a normally uncongested country road where an accident occurs, causing speed reductions (delays)
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139 Often, there is an additional complexity of the reliability problem associated with rare events; that is, truly rare events play out over very long time periods and can occur at any time in the interval -- not just at the end of the interval. This makes the use of the European option inappropriate, because this option assumes a finite horizon and exercise at the end of the interval.
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140 ing in a project that would protect a segment of highway from the effects of avalanches in the segment right-of-way. The agency wishes to know whether it is worthwhile to do so.
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141 0.00 0.02 0.04 0.06 0.08 0.10 0.12 0.14 0.16 0 2 4 6 8 10 12 14 16 18 20 Avalanche Closures per Month (December-March) Pr ob ab ili ty o f Av al an ch e Cl os ur e Figure C.3.
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142 multiple instances occur simultaneously. For example, a highway network might have three alternative passes at risk of avalanche, but significant delays occur only if all three passes experience an avalanche.
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143 strategy. The present value of the costs of installing the pumping system is $101 million.
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144 The probability of occurrence of two hurricanes is highest as shown by the Gumbel distribution in Step 1B.
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