…it’s pretty boring, but if you’re interested in reading about how we should make decisions in the present when we’ll have flexibility in the future, you can find it here on the Georgetown Law Journal’s website. Here’s the first section, which gives a medium-length summary.
My “statement of originality,” which I actually think is the best, shortest description of the note, is below the fold.
Statement of Originality | Valuing Regulatory Real Options
This note is about uncertainty, and how people who will have flexibility in the future should make present-day decisions. Specifically, this note addresses the process regulators use in determining whether to issue a regulation. Regulators act in the face considerable uncertainty; that is, they don’t really know for certain whether a given regulation will turn out to be successful. Fortunately, regulations that have been issued can be retracted later on (via a process called “regulatory lookback”). In other words, regulators have flexibility.
This note argues that the way regulators decide whether a regulation is worthwhile (called “cost-benefit analysis,” or CBA) does not adequately account for this flexibility, and that a different framework, called “Real Options Valuation,” would be a better approach. The note includes a case study explaining how real options valuation could be applied, using the same information regulators already have.
Real options valuation is relatively recent innovation, but it has gained a foothold in legal scholarship. This note is novel insofar as it applies an emerging valuation methodology to a longstanding legal problem in a way that ameliorates some critics’ concerns. (CBA has always been controversial; Georgetown Law’s Lisa Heinzerling is perhaps CBA’s most cogent critic.)
Moreover, this note is timely for two reasons. First, the Obama administration has dramatically expanded “regulatory lookback,” the formal avenue under which regulators can use empirical information to re-assess existing regulations. Second, regulatory agencies (particularly the SEC) have been attacked with increasing frequency for inadequate efforts to quantify the uncertain costs and benefits of regulations.1 The approach suggested by this note provides an alternative strategy for regulators seeking to ameliorate uncertain and poorly understood risks.