This dissertation focused on the problem of mismeasurement of benefits provided by information technology. Specifically, this dissertation examined the potential of "real options" to assist in measuring the flexibility provided by information technology.;This dissertation developed a three level integrated model detailing how real options fit into the information technology valuation process. The top level of the model describes how real options fit into the overall cost and benefit framework. The next level describes the components that determine the total value of the real options for a single project. The third level describes the components that determine the value of any particular real option.;This dissertation performed a benchmark study to establish the existing and potential use of real options in the insurance industry. The study performed in this dissertation was the first large scale effort to determine how real options are being used in any industry to evaluate any type of real project. The benchmark data was gathered by the use of a questionnaire. This questionnaire was developed from scratch since no previous work has been done in this area. The questionnaire was sent to the chief information officers of over four hundred insurance companies.;This research has found that very few companies are aware of the concept of real options and even fewer have any formal process to include the value of the real options in their existing analysis process. Based upon the responses to the questionnaire and the non-response rate, more "marketing" of real options must be accomplished before companies will expand their existing analysis tools to include real options. The existing system development and cost analysis models must be expanded to include the value of real options.;This dissertation added to the growing knowledge concerning the application of option pricing theory to real projects. Little work has been done in applying real options to actual industry situations. More effort and education is needed to transfer real options from the academic arena to industry use. This effort is vital since existing analysis tools such as net present value underestimate the value of real projects.
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