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Springer Climate

Benoit Morel

Real Option
Analysis and
Climate Change
A New Framework for Environmental
Policy Analysis
Springer Climate

Series Editor
John Dodson, Chinese Academy of Sciences, Institute of Earth Environment, Xian,
Shaanxi, China
Springer Climate is an interdisciplinary book series dedicated to climate research.
This includes climatology, climate change impacts, climate change management,
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Now indexed in Scopus1 !

More information about this series at http://www.springer.com/series/11741

Benoit Morel

Real Option Analysis

and Climate Change
A New Framework for Environmental Policy
Analysis
Benoit Morel
Carnegie Mellon University
Pittsburgh, PA, USA

Note: In this book, ROA refers to real option analysis, not to return on assets or other uses of
that acronym.

ISSN 2352-0698 ISSN 2352-0701 (electronic)

Springer Climate
ISBN 978-3-030-12060-3 ISBN 978-3-030-12061-0 (eBook)
https://doi.org/10.1007/978-3-030-12061-0

© Springer Nature Switzerland AG 2020

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This Springer imprint is published by the registered company Springer Nature Switzerland AG.
The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland
To Alexandra, without whom that book would
not exist
Preface

For the better of ten years I taught a course on real options at Carnegie Mellon
University. The goal was to show that real option analysis (ROA) had the potential to
fill a serious gap in environmental policy by providing a powerful tool to deal with
large uncertainty. Most papers on the subject start with the observation that such
tools do not exist. Net present value (NPV) is blatantly limited as it deals with
expected values, i.e. averages of distributions. But it is insensitive to the details of
the uncertainty. The “neo-classical approach” is an awkward framework for quan-
titative analysis of uncertainty, especially if and when the uncertainty is large.
But ROA in its present form is also an awkward tool to support investment
decisions under uncertainty. It dawned on me progressively that ROA could be
approached differently from what is the case. It is treated as an extension of financial
option theory to be applied to corporate investments and eventually to all investment
under uncertainty. The first extension is relatively solid, but the second extension has
been done in such a way that the result was this ugly duckling where the Black–
Scholes formula shows up in context where it does not belong and the uncertainty
does not reflect the problem at hand. Worse, ROA degenerated in a set of half baked
recipes where several different approaches are used in parallel, with little conceptual
commonality.
It dawned on me that it was not necessarily that difficult to improve the situation
by realizing that ROA is a stand-alone paradigm and financial options are a special
case, where the uncertainty stems from the dynamics of change of tradable assets.
The narrative of this book is about that.
In the first chapters, the fundamentals of option theory are revisited by coming
back to the origin, i.e. the Ph.D. thesis of Gaston Bachelier. The mathematical
framework that comes out is applied to the existing field of real options, partially
to reinforce its strong points but also to point to some of its weaknesses. In fact this
book is at times quite critical of the present state of ROA for its lack of mathematical
and conceptual rigour.
The chapter about extreme events and catbonds (Chap. 4) makes the transition to
the second part of the book. Extreme events provide an example where the

vii
viii Preface

uncertainty is described by fat-tailed distributions, and the estimation of the value of

catbonds, something that earlier versions of ROA did not know how to deal with
(let alone NPV). The next chapters are about environmental policy, mitigation and
adaptation. The idea is to illustrate the kind of insights that ROA provides. Each
chapter brings its set of surprising results. The intended message is that ROA is best
used not as a set of recipes but as a powerful tool to be used intelligently.
In Appendix A, I tried as diplomatically as possible but firmly to point to a
shameful confusion commonly made between two kinds of “real options”. The only
feature those two forms of real options have in common is that they deal with
investments under uncertainty. One kind of real options has to do with finding the
optimal conditions for investments under uncertainty. The other kind of real options
are those who were inspired originally from the Black–Scholes contribution to
financial options. They are a quantification of the effect of uncertainty on the
value of investments. Both are mathematically and conceptually different. This
book is about the Black–Scholes inspired real options.
Appendix B is for those who want to see more concretely how the mathematical
apparatus developed in the book can be used in practice.
In other words, I tried to write the book, I wished existed when I started teaching
about ROA.

Pittsburgh, PA Benoit Morel

Contents

1 Prolegomena: What Does Real Option Analysis Bring to Climate

Change Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Introducing the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 The IPCC Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2.1 Dealing with the Uncertainty and the Limitations
of Existing Mathematical Models . . . . . . . . . . . . . . . . . . 3
1.2.2 Cost Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2.3 Limitations of Net Present Value . . . . . . . . . . . . . . . . . . 5
1.2.4 Prospects Offered by Real Options . . . . . . . . . . . . . . . . . 6
1.3 Risk and Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2 Toward a General Theory of Real Options . . . . . . . . . . . . . . . . . . . 9
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
2.1.1 The Impact of Black–Scholes on Real Options . . . . . . . . 10
2.1.2 Black–Scholes as a Black Swan . . . . . . . . . . . . . . . . . . . 11
2.2 What Are “Options”? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.1 Value of Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2.2.2 Risk-Neutral Valuation of Options . . . . . . . . . . . . . . . . . 13
2.3 The Role of the “Corporate Culture” in the Genesis
of Real Option Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
2.4 Financial Options as a Particular Case of Real Options . . . . . . . . 14
2.5 Prospects of ROA in Environmental Policy . . . . . . . . . . . . . . . . 15
2.6 Foundations of Option Theory . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.6.1 Bachelier’s “Théorie de la Spéculation” . . . . . . . . . . . . . 15
2.6.2 The Emergence of Real Options . . . . . . . . . . . . . . . . . . . 17
2.7 The Mathematical Foundations of ROA . . . . . . . . . . . . . . . . . . 21
2.7.1 Mathematical Framework . . . . . . . . . . . . . . . . . . . . . . . 21
2.7.2 The Value of Exchanging Two Risky Assets . . . . . . . . . 21
2.7.3 First-Degree Homogeneity . . . . . . . . . . . . . . . . . . . . . . . 22

ix
x Contents

2.7.4 Sum and Ratio Distributions . . . . . . . . . . . . . . . . . . . . . 23

2.7.5 Risk Neutrality Mathematically and Its Effect
on the Valuation of Options . . . . . . . . . . . . . . . . . . . . . . 25
2.7.6 The Black–Scholes Formula . . . . . . . . . . . . . . . . . . . . . 26
2.7.7 Black–Scholes Cannot Be Applied Everywhere, but
There Is Life in Real Option Theory Outside
of Black–Scholes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.7.8 When Can Risk Neutrality Be Invoked? Portfolio
Argument . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.7.9 How Does One Recognize When Risk Neutrality
Applies? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.8 Toward a Real Options Theory . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.8.1 The Basic Structure of a Real Option Valuation . . . . . . . 30
2.8.2 Can We Speak of a Theory of Real Options? . . . . . . . . . 31
2.8.3 What Do Theories Do? . . . . . . . . . . . . . . . . . . . . . . . . . 32
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3 Real Option Analysis: Work in Progress, in Need of Progress . . . . . 35
3.1 Net Present Value Compared with Real Options . . . . . . . . . . . . 35
3.2 Classical Real Options Success Stories . . . . . . . . . . . . . . . . . . . 36
3.2.1 Strategic Investments . . . . . . . . . . . . . . . . . . . . . . . . . . 36
3.2.2 Compound Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
3.2.3 The “License to Kill” Problem . . . . . . . . . . . . . . . . . . . . 37
3.2.4 Flexibility in the Design of a Project . . . . . . . . . . . . . . . 39
3.2.5 The Value of Abandoning a Project . . . . . . . . . . . . . . . . 40
3.2.6 Growth Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
3.3 When ROA Raises Serious Legitimate Questions . . . . . . . . . . . . 42
3.3.1 The Borison Controversy . . . . . . . . . . . . . . . . . . . . . . . 42
3.3.2 A Call for More Theoretical Precision:
The Georgetown Challenge . . . . . . . . . . . . . . . . . . . . . . 45
3.3.3 A “Solution” of the Problem of Borison that Meets
the Georgetown Criteria . . . . . . . . . . . . . . . . . . . . . . . . 45
3.3.4 The McDonald-Siegel Model . . . . . . . . . . . . . . . . . . . . . 47
3.4 Are Real Options Speculative Instruments? Hedging
Instruments? Decision Tools? Risk Management Tools? Are
They Truly Derivatives? Does ROA Somehow Relate to Bond
Valuation? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
3.4.1 Thales of Miletus: The First Instantiation of Option
as Speculative Instrument . . . . . . . . . . . . . . . . . . . . . . . 48
3.4.2 Nature of Real Options . . . . . . . . . . . . . . . . . . . . . . . . . 48
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4 Extreme Events, Cat Bonds, ROA in the Context of Fat Tail
Distributions, and the Weitzman Effect . . . . . . . . . . . . . . . . . . . . . . 51
4.1 Setting the Problem . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.1.1 Catbonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.1.2 Extreme Events and Power Law Distributions . . . . . . . . . 52
Contents xi

4.2 The Weitzman Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

4.2.1 Conditional Probability for Triggering Events . . . . . . . . . 56
4.2.2 The Weitzman Effect Mathematically . . . . . . . . . . . . . . . 57
4.3 Catbonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.3.1 Catbonds in Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
4.3.2 Catbonds in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5 Global CO2 Emission Mitigation Through the Looking Glass
of ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.2 ROA and Climate Change: Setting Up the Problem . . . . . . . . . . 70
5.2.1 Irreducible Uncertainty on Temperature Increase . . . . . . . 70
5.2.2 Building the Mathematical Expression of the ROA Value
of Mitigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
5.2.3 The ROA Value of a Climate Change Mitigation Policy
Is Infinite . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
5.2.4 Deconstructing the Source of the Infinity . . . . . . . . . . . . 76
5.2.5 The Weitzman Effect Applies Here on Steroids . . . . . . . . 77
5.3 Extracting Finite Numbers Out of Infinities . . . . . . . . . . . . . . . . 78
5.3.1 Probability of Exceedance and the Importance
of the Parameter ΔT0 in Eq. 5.1 . . . . . . . . . . . . . . . . . . . 78
5.3.2 Environmental Value at Risk (EVaR) . . . . . . . . . . . . . . . 80
5.3.3 Relative Entropy and the Kullback–Leibler Divergence . . 81
5.4 A Cheap and Easy Way to Improve the Situation? . . . . . . . . . . . 82
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
6 Internationalization of the Response: The Example of the REDD
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
6.1 Importance of Forests and REDD Credits . . . . . . . . . . . . . . . . . 85
6.1.1 REDD Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.2 What REDD Credits Could Be in Theory . . . . . . . . . . . . . . . . . 87
6.2.1 Modeling the Uncertainties . . . . . . . . . . . . . . . . . . . . . . 87
6.2.2 Framing the Quantification of the Transaction . . . . . . . . . 88
6.3 Complicating Factors: Alternative Use, Ecosystem Services,
Biodiversity, etc . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
6.3.1 Valuing Ecosystem Services . . . . . . . . . . . . . . . . . . . . . 91
6.3.2 Biodiversity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
6.3.3 Weisbrodian Perspective . . . . . . . . . . . . . . . . . . . . . . . . 92
6.4 REDD Credits in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
7 Prioritizing the Investments Needed to Avoid the Unmanageable
(Mitigation) and to Manage the Unavoidable (Adaptation) . . . . . . . 95
7.1 Adaptation and Mitigation Are Different Problems . . . . . . . . . . . 96
7.2 Financing Adaptation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.2.1 The Context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.2.2 Where ROA Comes In . . . . . . . . . . . . . . . . . . . . . . . . . 98
xii Contents

7.3 Financing Mitigation and the Transition into a Green

Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
7.3.1 Corporate Culture and Green Investments . . . . . . . . . . . . 104
7.3.2 Risk Profile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
7.3.3 Co-benefits of Green Investments . . . . . . . . . . . . . . . . . . 105
7.3.4 Financing Innovation . . . . . . . . . . . . . . . . . . . . . . . . . . 108
7.4 Climate Bonds, Green Bonds, and the Financing of Green
Investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
7.4.1 Green Bonds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
8 Unanswered Questions About Uncertainty, Information,
and Investment Decisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
8.1 Climate Change Decision-Making . . . . . . . . . . . . . . . . . . . . . . . 117
8.2 Thinking in Probabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
8.3 The Intrusion of Subjectivity as a Legitimate Contributor
of Collective Decision-Making . . . . . . . . . . . . . . . . . . . . . . . . . 120
8.4 The Scarcity of Information Conundrum . . . . . . . . . . . . . . . . . . 122
8.5 Can ROA Make a Difference in Climate Change Policy? . . . . . . 123
8.6 Ugliness, Thersites, and Climate Change . . . . . . . . . . . . . . . . . . 124
8.7 Oil Painting and ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128

A Optimizing the Conditions of Investments Under Uncertainty:

“Real Option” Can Mean Different Things that Should Not Be
Confused . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
A.1 McDonald and Siegel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
A.2 Linkage with the Black–Scholes-Based Approach to ROA . . . . . 131
B ROA and Climate Change in Practice . . . . . . . . . . . . . . . . . . . . . . . 133
B.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
B.2 The Basics of ROA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 134
B.2.1 Effect of First-Degree Homogeneity . . . . . . . . . . . . . . . 135
B.3 Climate Change Policy Choices . . . . . . . . . . . . . . . . . . . . . . . . 135
B.3.1 Discussion of Report Recommendations . . . . . . . . . . . . 138
B.3.2 Deforestation, Reforestation, Afforestation . . . . . . . . . . . 139
B.3.3 Vulnerability to Extreme Events . . . . . . . . . . . . . . . . . . 139
B.3.4 Promoting Energy Production Less Carbon Intensive . . . 140
B.4 France as Example or Case Study on How High Level
Recommendations Speak to Environmental Policy . . . . . . . . . . . 141
B.4.1 France’s Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
B.4.2 Contours of an ROA-Based Optimal Strategy . . . . . . . . . 145
B.5 Transports: Electric Vehicles as case Study . . . . . . . . . . . . . . . . 146
B.5.1 About France and Electric Cars . . . . . . . . . . . . . . . . . . . 146
B.5.2 The ROA Value of Electric Vehicles (EV) . . . . . . . . . . . 147
Contents xiii

B.5.3 A Few Vital Statistics to Anchor the ROA Estimate . . . . 147

B.5.4 ROA of Moving Toward Electric Vehicles in France . . . 148
B.5.5 What ROA Has to Say About Electric Cars in France . . . 150
B.6 Combining Climate Change Adaptation with Disaster Risk
Management and Sustainable Development is a Common
Recommendation, Because They Are Often Linked. Can One
Quantify Those Linkages? . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
B.6.1 ROA and Linked Investments, a Few Random
Examples . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
B.6.2 How to Compute Ratio, Product, Sum, and Difference
Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
B.7 What ROA Is and Is Not . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Chapter 1
Prolegomena: What Does Real Option
Analysis Bring to Climate Change Policy

Abstract The word prolegomena is defined as “a critical or discursive introduction

to a book.” This is what it means here but with a twist. The German philosopher
Immanuel Kant (1724–1804) wrote Prolegomena zu einer jeden künftigen
Metaphysik, die als Wissenschaft wird auftreten können, or Prolegomena to Any
Future Metaphysics That Will Be Able to Present Itself as a Science. In that book,
Kant in a rather polemic way explained what he wanted to accomplish by writing a
previous book, Critique of Pure Reason, which many think is his masterpiece but
was poorly received at the time.

1.1 Introducing the Problem

Similarly, the premise of this book is a bit polemic, in that it is critical of the
evolution of real option analysis (ROA). It begins with the rather banal observation
that climate change policy suffers due to the inadequacy of existing policy tools.
Whereas the science of climate change is quite advanced and still progressing, the
related economics and policy lag far behind. This is illustrated in the so-called AR5
IPCC report. Every few years, the Intergovernmental Panel on Climate Change
(IPCC) produces an Assessment Report (AR). AR5—which came out in
2013–2014—is the fifth, and for the time being (2017) the most recent, such report.
Adaptation and mitigation are the two components of the response to climate
change. Although they are conceptually completely different, they tend to be treated
together. They differ in the sense that mitigation is a collective effort of all nations to
control the atmospheric content of green house gases (GHG), whereas adaptation
refers to the steps each country takes individually to mitigate the effects of climate
change. Each nation has an interest in what other nations do in mitigation as it
potentially affects them. Mitigation is an instantiation of the problem of the man-
agement of the commons, along with the lines of the late Nobel laureate in economy,
Elinor Ostrom that is, it is based on the interaction of many actors with ecosystems.
Here, it is through multilateral international agreements.
Adaptation is ultimately a national problem, and in most cases what individual
nations do does not affect the other nations. The fact that there is an overlap between

© Springer Nature Switzerland AG 2020 1

B. Morel, Real Option Analysis and Climate Change, Springer Climate,
https://doi.org/10.1007/978-3-030-12061-0_1
2 1 Prolegomena: What Does Real Option Analysis Bring to Climate Change Policy

adaptation and mitigation, in the sense that some mitigation measures can contribute
to adaptation or vice versa, does not change the fundamental difference between the
two. The IPCC report treats adaptation and mitigation separately. Adaptation is
treated in the WGII report, whereas mitigation is the subject of the WGIII report.
The IPCC reports are huge endeavors, involving thousands of the best experts on
all aspects of climate change. The list of authors reads like a Who’s Who in that field.
As reports, they are the ultimate authority on the topic of climate change. The reports
are divided in several sub-reports produced by different Working Groups (WG).
WGI focuses on the “physical science basis” of climate change: WGII focuses on
“impact, adaptation and vulnerability”; and WGIII focuses on “mitigation of climate
change.” Finally, there is a “synthesis report.” Each sub-report is extremely long,
and it is difficult to believe that anybody would go through them. The WGII report
on adaptation is close to 1800 pages, while the WGIII report has no less than 1454
pages. They are longer than the Bible, and in one sense better, in that they leave
much less room for conflicting interpretations. Furthermore, they have far more
authors, and we know their names. Still, treating them as a Bible may not be the best
idea. They are still work in progress.

1.2 The IPCC Reports

The reports are basically a review of all contributions to climate change. At times,
they go to such great lengths to avoid omissions that the reader gets the sense of
going through a laundry list of contributions, connected by very thin thread. As a
result, they provide a thorough overview of the present state of the art. However,
especially in climate change policy, the “state of the art” is somewhat scattered, and
trying to create the impression of greater coherence would be a distortion.
The executive summary of the WGIII report reads: “Climate change mitigation
can be framed as a risk management exercise. It may provide large opportunities to
humankind, but will also be associated with risks and uncertainties. [. . .] The intent
of the report is to facilitate an integrated and inclusive deliberation of alternative
climate policy goals and the different possible means to achieve them (e. g., tech-
nologies, policies, institutional settings). It does so through informing the
policymakers and general public about the practical implications of alternative
policy options, i.e., their associated costs and benefits, risks and trade-offs.”
In practice, the report’s findings or conclusions do not easily translate into policy
recommendations, and a lot is left to the policymakers. If the goal is to provide
policymakers with everything they need to make informed, wise, or optimal climate
change decisions, the reports fall seriously short. The few policymakers who have
the attention span to go through the reports are left in a jungle of unsolved issues, the
most prominent of which are the uncertainties.
Mitigation policy has a long-term dimension (the benefit will be felt in a distant
future) and a short-term dimension (the cost starts as soon as the policy starts). Both
are mired in uncertainty. And a discount term, whose value is notoriously
1.2 The IPCC Reports 3

controversial, has to enter. Its effect is to make the benefits that belong to the long-
term future smaller without affecting the cost, which have to be born in the
short term.

1.2.1 Dealing with the Uncertainty and the Limitations

of Existing Mathematical Models

Furthermore, uncertainty is not static. It changes with experience and additional

knowledge: knowledge about the success of the mitigation policy as measured by the
evolution of the atmospheric load of CO2; knowledge of how fast the transition to a
green economy is going; and knowledge of how the environment responds to climate
change.
Mitigation policy is a path-dependent process finding its way in a thick fog of
uncertainties. Whether in the parlance of Manne and Richels (1991), it is best framed
as “learn and act” or “act and learn” or a combination of both, one of the best ways to
get some insight into the possible futures is based on scenarios. This technique is
used to predict the trajectory of hurricanes. Many scenarios are run, and the results
give the best guess on the distribution of probability as to where the hurricane is
heading. In the case of hurricanes, the laws of physics involved are well known. Still,
the dynamics of airflows is so complicated that the best computer programs reach
their limits and the simulation has to be updated as soon as more is known.
When it comes to predicting the future of the world in the context of mitigation,
the knowledge base is much smaller, but the number of variables is not. The tools
used to base the scenarios, so-called integrated assessment models (IAM), tend to be
models like the Manne and Richels Global 2100 (1991) or the Nordhaus DICE
(Nordhaus 1993), among others. Those models couple the economy to the climate
change policy. They model the economy with the Ramsey macroeconomic model,
which assumes an economy made of capital and labor. Capital and labor enter in the
production function (proxy for the GDP). The fundamental assumption of that model
is that there is a natural mechanism that maximizes an expected utility build from the
consumption. This model plays a central role in macroeconomics. Manne and
Richels extended this model to make investment in diverse forms of energy more
visible. This has become a model for an optimized economic management of energy
policy. DICE and the models inspired by it introduce an environmental damage
function, which negatively affects the GDP.
From a mathematical point of view, the Ramsey model is an optimal control
problem where the consumption is the control variable and the capital is the dynamic
variable. Mitigation adds a new control variable: the level of mitigation. The level of
mitigation comes at a cost of the economy. The problem is determining the optimal
cost level. This construct builds a model for an optimal mitigation policy.
IAM have known limitations: one is that the result depends strongly on the choice
of environmental damage function. Nobody in their right mind knows what a
4 1 Prolegomena: What Does Real Option Analysis Bring to Climate Change Policy

damage function should be if the temperature increases by more than 2  C or 3  C,

except that the damage is probably severe. Optimal control problems by nature need
to allow the variables take those kinds of values. As a result, those models give
predictions even for situations where the increase of global temperature exceeds
10  C, a world we cannot begin to imagine. In a nutshell, their damage function
stinks when it matters.
A second well-known limitation is that being economic models, IAM have a
discount rate. Considering that the time period is far in the future and the potential
damage becomes serious only on the distant horizon, its impact on the result is small
as it is discounted over many years. One result is the embarrassingly small cost of
mitigation predicted by those models. More fundamentally, the impression is that
what really matters—the long-term environmental damage—plays a very small role.
This has significant implications for mitigation policy and, for example, the value of
hedging or “buying greenhouse insurance” (Manne and Richels 1991). In the words
of Lorenz et al. (2012), “Common integrated assessment models (IAM) of climate
change suggest uncertainty has little effect because the marginal risk premium in
these models is small.”
A third, less-discussed limitation is how it deals with the possibility of an
environmental catastrophe. The fat tail behind this possibility originates in the
relation between the atmospheric load of GHG and its translation into an increase
of temperature (cf Chap. 5). In principle, this could be approached in those models.
The atmospheric load of GHG is a dynamic variable. The damage function is
expressed as a function of the increase in temperature associated with the atmo-
spheric load of GHG. In principle, it should be possible to translate within those
models any value of the atmospheric load of GHG into a probability distribution
function (PDF) with fat tail for the increase of temperature. But this is easier said
than done. Those models are based on a dynamic representation of climate change.
To operationalize the idea of including fat tails in those IAMs, one would need to be
able to generate the fat tail dynamically. This would necessitate an understanding of
how a fat tail in the PDF for the temperature increase progressively develops as a
result of climate change. One way to do this is for every value of the increase of
GHG atmospheric load to systematically sample the PDF of the corresponding ΔT.
That distribution has a growing fat tail. But the fat tail is due to low-probability
events. The logistic of generating such an effect in the context of IAM seems
hopeless and is probably not worth the effort.
In other words, IAM are not good instruments to discuss the effect of uncertainty.
One thing is certain: uncertainty is the mother of the unsolved problems in climate
change. The word uncertainty appears on average once per page in the 1454 pages of
the AR5 WGIII report, and it inspires all sorts of comments and developments.
Many of them are biodegradable. The most portent comments are those one would
reserve for an untamed shrew.
1.2 The IPCC Reports 5

1.2.2 Cost Benefit Analysis

According to the same report, CBA offers a lot of promises, if it were not for the
damage caused by the fact that uncertainty is so out of control. When explaining the
limitations of CBA, the report invariably mentions the problem with low-probability
catastrophic events, i.e., fat tail distributions of effects. CBA in its present form does
not handle those situations well. In fact, CBA in its present stage has the same
problem as Net Present Value (NPV). It is blind to the details of the “shape” of the
uncertainty. When one sets a limit of 2  C or 1.5  C for the “tolerable” increase of
global average temperature, it is implicit (but not stated with that level of precision)
that the atmospheric concentration of GHG at its peak should yield a PDF for the
increase of average temperature whose average is 2  C or 1.5  C. There is a large
uncertainty as to how a given atmospheric load of GHG translates into a global
average for the surface temperature. With a low but non-zero probability, it could be
significantly above the average. In fact, that probability cannot be made even
negligible. When this uncertainty is expressed as a PDF, that PDF has a fat tail
(Chap. 5). All the AR5 IPCC WGIII has to offer to policymakers is, “Climate policy
may be informed by a consideration of a diverse array of risks and uncertainties,
some of which are difficult to measure, notably events that are of low probability but
which would have a significant impact if they occur.” It is up to the policymakers to
transform this pumpkin of a statement into a royal coach appropriate for the beautiful
princess that their policy initiatives are expected to be.
The authors of the IPCC reports are the best and the brightest in the field. If the
reports fall short in important aspects of climate change policy, it is because the state
of the art is not where one would like it to be, something difficult to cover in a report
like that.

1.2.3 Limitations of Net Present Value

When it comes to have a better grasp of the effect of the uncertainty, NPV-based
approaches are inferior because they are not sensitive to the “shape” of the PDF,
expressing the uncertainty only to the average value. This is where real option
analysis has the potential to make a difference.
Real options are the expected benefit from an investment under uncertainty. Also,
the cost can be known only with uncertainty. As shown in this book, the uncertainty
can be any uncertainty, as long as it can be expressed as a PDF. Not all uncertainties
do but most can. If real options were playing a much more central role in climate
change policy, the translation of uncertainties into PDF would be far more advanced.
Today there is no such need as there is no receiving structure for such PDFs, because
neither NPV nor CBA or IAM qualify.
Why then is real options not used more in the context of climate change policy?
The answer offered here is that the field of real options evolved in such a manner that
6 1 Prolegomena: What Does Real Option Analysis Bring to Climate Change Policy

it lost its way and its early promises did not materialize. The point of this book is that
by revisiting the fundamentals of real options, one can recover or discover its
potentials, which have not been exploited.

1.2.4 Prospects Offered by Real Options

Real options in a sense are closely related to financial options. But too much has
been made of this apparent proximity. They also have differences, which are
important here. Financial options are in fact only a subset of a larger world, the
world of real options. Financial options are a special case of real options where the
uncertainty can be modeled by a stochastic process like a geometric Brownian
motion. Concepts like risk neutrality apply because financial options can be traded.
They are speculative instruments. In general, real options cannot be traded. They
represent the value (estimated benefit) of an investment. Financial options can be
purchased. But in most cases, real options cannot be purchased. Their value is
indicative. Risk neutrality applies in rare cases in real options. For example, it
applies when measuring the value of a corporate investment, where the investment
is part of a strategic corporate plan intended to generate a predetermined return. This
rarely occurs in the context of environmental policy.
In environmental policy, the uncertainty rarely if ever proceeds from a stochastic
process. Uncertainty can have all types of origins. As long as it can be expressed as a
PDF, real option analysis is possible. But it proceeds somewhat differently from the
way people approach real option valuation.
Compared with what has been the tradition in real options so far, much more
mathematical rigor and precision is needed to make real option analysis work as a
stand-alone paradigm. For example, risk neutrality applies sometimes, but not
always. Other mathematical considerations—which were ignored or treated as
technicalities—are in fact very important, for example, “first-degree homogeneity.”
No practitioner of real option analysis seems to have realized that first-degree
homogeneity does not always apply and this has consequences for the valuation of
the option. Am I suggesting that the field of real option progressively sank into some
kind of intellectual morass? I will let the reader decide. The goal of this book is to
show that real option analysis can be framed in such a way that it speaks to all
aspects of climate change policy.

1.3 Risk and Uncertainty

Have no respect whatsoever for authority: forget who said it and instead look at what it starts
with, where it ends up and ask yourself: is it reasonable? Richard Feynman
References 7

Economists seem to agree that a distinction should be made between risk and
uncertainty (Knight 1921). It is not obvious that they agree on how to define the
difference. F. Knight suggests that “we speak of the ‘risk’ of a loss, [and of] the
‘uncertainty’ of a gain”.
Still, there is a consensus that for an investor to take a risk, he must have
something to lose. In the context of climate change investment, when the risk is
environmental damage, the situation differs from commercial investments. Can we
say that the uncertainty is in the benefit of mitigation or adaptation measures, and the
risk is measured in environmental damage?
Many investments pertaining to the response to climate change share the same
risk and uncertainty characteristics as commercial investments, such as investments
in electric cars, solar power, or carbon capture and storage. But when the risk is
environmental damage, there is potentially a lot to lose by not making those
investments. In other words, environmental policy involves risk of a completely
different nature from the risk economists have in mind.
Uncertainty plays a central role in climate change policy. Uncertainty is based on
the fact that we do not have a perfect view of the future. This is true in all contexts.
But the factors behind our inability to predict the future and the implications of this
are significantly different for economic investments and climate change. In the case
of climate change, the implications of uncertainty can be ominous.
Uncertainty means that the outcome at best can only be predicted probabilisti-
cally, by a PDF. If one repeated the same investment many times, one would
reproduce the PDF representing the uncertainty. As long as the uncertainty is not
very large, the outcome can be approximated by its expected value in the spirit of
NPV. But when the uncertainty becomes large, because, for example, the PDF of
outcomes has a fat tail, the situation is qualitatively different. It is a case where
quantity affects quality, a situation popularized by the German philosopher Georg
Hegel (1812).
When the uncertainty is very large, what works for lower levels of uncertainty no
longer applies (Courtney et al. 1997). The degree of uncertainty encountered in
environmental policy is rarely present in commercial investments. Furthermore, in
corporate investors typically avoid situations with high levels of uncertainty. This
option does not exist in climate change. It is imperative to confront a situation mired
in a high level of uncertainty and develop a way to make this uncertainty speak to the
policy choices. This begins with quantifying the effect of the uncertainty, if and
when possible. This is what real option analysis is about.

References

Courtney, Hugh, Jane Kirkland Patrick Viguerie, (1997), Strategy under uncertainty, Harvard
Business Review November–December 1997 Issue, https://hbr.org/1997/11/strategy-under-
uncertainty
8 1 Prolegomena: What Does Real Option Analysis Bring to Climate Change Policy

Hegel, G.: Wissenschaft der Logik (1812), translated as Science of Logic, http://www.inkwells.org/
index_htm_files/hegel.pdf
Knight, F.: Risk, Uncertainty and Profit. Schaffner and Marx, Boston (1921). http://www.econlib.
org/library/Knight/knRUP.html
Lorenz, A., Kriegler, E., Held, H., Schmidt, M.G.W.: Climate Change Economics. 03(01), (2012)
Manne, A.S., Richels, R.G.: Buying Greenhouse Insurance. MIT, Cambridge (1991). See also:
Manne A. S., and R. G. Richels (1991). Energy Policy 19, 543–552
Nordhaus, W.D.: Rolling the “DICE”: an optimal transition path for controlling greenhouse gases.
Resour. Energy Econ. 15, 27–50 (1993). See also: Nordhaus W. D. (1994). Managing the
Global Commons: The Economics of Climate Change. MIT Press, Cambridge, MA
Chapter 2
Toward a General Theory of Real Options

You can’t cross the sea merely by standing and staring at the
water
— Rabindranath Tagore (https://www.brainyquote.com/
quotes/rabindranath_tagore_383735).

Abstract This chapter reviews history of financial option from its origin with
Bachelier and continuing with the contributions of Black–Scholes and Merton.
The origin of the concept of real option (S. Myers) is also discussed. The relation
(conceptual and mathematical) between financial and real option, as well as the
concept of risk neutrality and its relevance for real options, is discussed ad nauseam.
In the process, a mathematical framework for real option analysis (ROA) is devel-
oped. This chapter is somewhat math-intensive. Of particular importance for the rest
of the book are the discussions of first-degree homogeneity and risk neutrality and
their mathematical implications.
Without the Black–Scholes formula, ROA would probably not exist. It was
Black–Scholes who inspired Stewart Myers to introduce the concept of real options
in his study of the value of a firm. He emphasized the importance of growth options
in the valuation of a firm, and he called those options “real options.” As a result, not
only does ROA have its roots in the culture of corporate investments, but it also grew
in that cobweb. The downside is that ROA is seen as a mere extension of financial
options, when in fact it should be the opposite: financial options being the particu-
larization to the world of finance of a broader concept, real options. When it comes to
climate change policy, this distinction is fundamental, because it is what makes ROA
applicable there.

© Springer Nature Switzerland AG 2020 9

B. Morel, Real Option Analysis and Climate Change, Springer Climate,
https://doi.org/10.1007/978-3-030-12061-0_2
10 2 Toward a General Theory of Real Options

2.1 Introduction

The goal of this book is to show that ROA can have a much broader range of
applications than it has today, using climate change policy as example. Those who
have tried to apply real option theory to climate change could not fail to notice that it
is as if they tried to make a paradigm apply outside its natural field of application.
The question becomes: is it possible to apply ROA to climate change policy? And if
yes, to what kind of restricted use? This book aims to prove that there is no hard limit
for applying ROA, hence the idea of building a “general theory of real options.”
J.M. Keynes (1936) justifies the title of his famous book, The General Theory of
Employment, Interest and Money, by placing the emphasis on the prefix “General.”
In his words: “The object of such a title is to contrast the character of my arguments
and conclusions with those of the classical theory of the subject, upon which I was
brought up and which dominates the economic thought, both practical and theoret-
ical, of the governing and academic classes of this generation, as it has for a hundred
years past. I shall argue that the postulates of the classical theory are applicable to a
special case only and not to the general case, the situation which it assumes being a
limiting point of the possible positions of equilibrium. Moreover, the characteristics
of the special case assumed by the classical theory happen not to be those of the
economic society in which we actually live, with the result that its teaching is
misleading and disastrous if we attempt to apply it to the facts of experience.”
This is exactly, but in a much more modest way, what this book contends when it
comes to real options. . . Does the field of real options need a “general theory”? What
could that add? When you look at that question from the perspective of how to
generalize the scope of application of ROA, the answer becomes obvious. The need
is obvious, but the question is how to do it.

2.1.1 The Impact of Black–Scholes on Real Options

After the 1973 seminal papers of Black, Scholes and Merton, financial option theory
embarked on a spectacular trajectory. It was like a testimony to human ingenuity, a
revolution in the way humans approach finance. But when used as a template to
develop ROA as an extension or spin-off of financial options outside the confines of
finance, the majesty of Black–Scholes turned out to be seriously stifling. It is not the
way the “practitioners” of ROA would put it. Instead they found solace in finding
any possible excuse to stay as close as possible to Black–Scholes. That meant using
the formula as often as possible (without necessarily a lot of justifications), assuming
risk neutrality whether or not it could be justified, and assuming that any form of
algorithm used in the context of investment under uncertainty is an instantiation of
“real option.” In the latter case, optimal timing of an investment is considered an
instantiation of ROA even if (as shown in the Appendix of this book) this is a
completely different problem (conceptually, mathematically, and otherwise). Over
2.1 Introduction 11

time, ROA developed different ways to estimate the real option value of an invest-
ment without clear conceptual reasons to justify that these apparently completely
different algorithms were equivalent ways to estimate this value. In fact they were
not and were yielding different results. This no doubt contributed to weakening the
appeal of an approach to investment under uncertainty. Instead of being “not wrong
but nearly right” (as Lowenstein said about Merton and Scholes in his book on the
fiasco of Long-Term Management Fund in 1997), the proponents of ROA did a good
job of projecting the impression that they had hardly any clue as to the actual value of
an investment under uncertainty. It progressively became an intellectual swamp.
Needless to precise that the world of real options did not replicate the splendor of
Black–Scholes, otherwise this book would have no raison d’être. The fact that ROA
slowly dug its own hole does not mean that the achievements of real options are
nonexistent and their whole history has been a complete failure. But compared with
what it could or should have been, ROA is an “ugly duckling.”

2.1.2 Black–Scholes as a Black Swan

Nassim Taleb made “Black Swan” a buzzword (Taleb 2007). He asserts: “What we call
here a Black Swan (and capitalize it) is an event with the following three attributes.
First, it is an outlier, as it lies outside the realm of regular expectations, because nothing
in the past can convincingly point to its possibility. Second, it carries an extreme
‘impact.’ Third, in spite of its outlier status, human nature makes us concoct explana-
tions for its occurrence after the fact, making it explainable and predictable.”
The Black–Scholes formula meets all three criteria of Nassim Taleb, so it
qualifies as a Black Swan. This is an observation that may not be music to the ears
of Nassim Taleb, as he forcefully denounced that formula, among other things, as
being responsible for the 2008 financial crisis.
Black–Scholes has been a milestone in the history of financial options and a nemesis
for real options. A lot of the flaws and problems ROA has run into have to do with its
inability to contain the impact of Black–Scholes by applying its formula and conceptual
framework where it does not belong. Instead, it should have taken a much cooler look at
how Black–Scholes is derived and based ROA on the same level of mathematical
precision and rigor. This is the subject of the next chapter and the rest of this book.
Black in Black–Scholes refers not to a color but to Fischer Black, a distinguished
economist. Black in “Black Swan” has a more colorful origin. The expression
“Black Swan” goes back centuries to a poem—which by today’s standards would
be deemed politically incorrect—by the Latin humorist Juvenal who lived in the first
century AD. In a poem entitled Why marry?, he compared a perfect wife to “a rare
bird on this earth, as rare as is a black swan.”1 The next verse reads: “Who could

1
This is the translation by Creekmore (1963): “rara avis in terris nigroque simillima cygno.”
12 2 Toward a General Theory of Real Options

endure a wife who has all the virtues known?” Because of the rarity of Black Swans,
very few have been given the opportunity to make the control experiment.

2.2 What Are “Options”?

The conventional wisdom is that: “Options at a cost give a right (as opposed to an
obligation) to do something. In the context of financial options, the right is to buy or
sell a good (like a share) at a certain price (exercise price) sometime in the future
(exercise time).” This characterization of options applies well to financial options,
but when it comes to real options in general, it is more often wrong than true. One is
never careful enough with conventional wisdom. “Conventional wisdom” is an
oxymoron because by nature wisdom is not conventional. For good reasons, the
economist John Kenneth Galbraith used that expression in a derisive way.
A much better characterization of an option would be the value of an option
measures the expected benefit that the purchaser of the option can reap by owning
it. In some contexts such as financial options, this is the value of the right to exercise the
option. But in the context of an investment under uncertainty, it is the potential benefit
of making the investment. In the case of financial option, you exercise the right of
exercising it only if it benefits you. In the case of an investment, the value of the option
is a virtual number: it gives an estimate of the expected benefit of the investment. The
option in that case is never purchased, but the investment makes sense only if the
expected benefit offsets its cost. The real option in that case is a decision variable, not an
instrument of speculation as is the case with financial options.

2.2.1 Value of Options

The conventional wisdom: options are “derivatives,” i.e., their value is determined
by how an underlying asset evolves with time. Typically the underlying asset
(a share) follows a stochastic process. In the seminal case of Black–Scholes, that
process is a geometric Brownian motion.
Real options need not be derivatives and in general are not derivatives. Their
value reflects an uncertainty, which in general does not derive from a stochastic
process. The concept of options as derivatives is a special case, which occurs mostly
in the narrow confines of finance. If the value of an investment depends on the future
value of oil or gas or palm oil or sugar cane, i.e., on the value of a commodity whose
price tends to follow a stochastic process, the real option value of that investment is a
“derivative.” But in general, the uncertainty associated with an investment has an
origin, which is not translatable into a stochastic process. For example, the uncer-
tainty regarding the increase of surface temperature associated with a given atmo-
spheric load of GHG has to do with the complexity of physics and cannot be
expressed as a stochastic process.
2.3 The Role of the “Corporate Culture” in the Genesis of Real Option Analysis 13

2.2.2 Risk-Neutral Valuation of Options

This is one place where ROA erred badly.

Conventional wisdom: what made Black–Scholes and the field of option theory so
unique is the observation by Fischer Black, Myron Scholes, and Robert Merton of
the relevance of risk neutrality.
The concept of risk neutrality has been a milestone in the history of financial
option valuation. A popular mistake is to apply it where it does not belong and more
generally to use the Black–Scholes formula in situations where the uncertainty does
not proceed from a geometric Brownian motion and risk neutrality does not apply.
How many practitioners of real options have bothered trying to understand what risk
neutrality is, and when it applies? Risk neutrality is discussed ad nauseam in the next
chapter and the rest of the book. It reflects a deep insight into the valuation of
financial option, which has been attributed by Fischer Black and Myron Scholes to
Robert Merton. It has everything to do with the fact that financial options can be
traded and are instruments of speculation. It reflects the fact that through trading
financial options will provide on average to speculators the market return, referred to
as the “riskless rate.” This kind of situation emerges in real options only when the
investment needs to have a predetermined return. This is often true for corporate
investments, but definitely not the case for environmental investments.

2.3 The Role of the “Corporate Culture” in the Genesis

of Real Option Analysis

Without Black–Scholes has been a milestone in the history of finance. And without
it, real option analysis would probably not exist.
Black–Scholes originated within the corporate culture. One of the starting points of
Black and Scholes (Black and Scholes 1973) in their seminal paper, “The Pricing of
Options and Corporate Liabilities,” was the observation that “corporate liabilities (i.e.,
warrants, common stock, corporate bonds, and debt) can be seen as a combination of
options.” The reference to corporate liabilities clearly guided their intuition when they
were deriving their famous formula, which is the foundation of what is today financial
option theory. The “Black–Scholes” formula is used mostly to value purely financial
instruments like European or American call options or European put options. Real
options also grew within the same corporate culture. This may be why it went astray.
As an intellectual construct, Black–Scholes was so impressive that it inspired
Stewart Myers to explore the possibility of applying it outside of the narrow confines
of speculative finances. It was in a paper entitled “Determinants of Corporate
Borrowings”(Myers 1977) that Stewart Myers coined the expression “real options.”
Central to the paper was the concept of “value of the firm,” which still is a subject of
major research. The insight of Stewart Myers was that “the value of a firm as a going
concern depends on its future investment strategy.” In other words, the firm is
14 2 Toward a General Theory of Real Options

influenced by growth opportunities, or “growth options,” which he called “real

options.” The paper of Stewart Myers appeared in 1977, 4 years after the Black–
Scholes paper. They were all—with Robert Merton—at MIT at the time.
The field of real options grew on that seminal contribution of Myers. Considering
the context in which the concept was introduced, it is not surprising that corporate
investments were the natural realm of application of ROA. What ROA developers
failed to appreciate was that when extending further the realm of application of
ROA, it was essential to revisit the fundamentals. The Black–Scholes formula can be
applied when a few conditions are met, like the uncertainty proceeds from a
geometric Brownian motion, risk neutrality, and first-degree homogeneity. None
of those conditions apply universally. Many are aware of the concept of risk
neutrality, even if they apply it more often than they should. But few seem to
appreciate the importance of the assumption of first-degree homogeneity and those
who do hide it very well.

2.4 Financial Options as a Particular Case of Real Options

Corporate investments were the first application of real options, and to a large extent,
ROA has developed around that kind of application. It is also the area where ROA is
closest to financial option theory. Real options have been treated as extensions of
options outside of finances. But most problems where ROA should apply do not fit
well in the intellectual construct associated with Black–Scholes.
In its first incarnation, the concept of real options was an extension of financial
options, but not a trivial extension. The value of the real options or growth options
was the expected benefits a company could make through discretionary investments.
Progressively the realm of application of ROA became broader to basically encom-
pass any investment under uncertainty.
A better approach would be to treat financial options as a special case of real
options. Both are expected benefits, but financial options correspond to the case
where the uncertainty proceeds from some stochastic process (geometric Brownian
motion in the case of Black–Scholes). In real options, the uncertainty can have all
sorts of origins and take a number of forms.
Even if real options should and can be made a stand-alone paradigm (as shown in
the next chapter)—and even if financial options are best seen as mere special cases of
real options—it remains that financial option theory is much more developed and
polished than real option theory. In developing the larger framework of ROA, one
keeps having to wrestle with the ramifications of the sophistication of financial
option theory. This permeates the entire field of ROA, all the way to areas sitting
as far apart from corporate investments as mitigation policy.
2.6 Foundations of Option Theory 15

2.5 Prospects of ROA in Environmental Policy

The science of climate change still has some room for improvement, but it is
significantly more advanced than its economics. Thanks to the reports produced by
authoritative sources like the Intergovernmental Panel on Climate Change (IPCC),
the world is becoming increasingly aware of the multiplicity and complexity of the
impact of climate change. The response calls for all kinds of investments, private and
public and small and large, in advanced economies as well as in nations with a
development deficit and an adaptation deficit.
We are still at the stage where the best reports provide laundry lists of things to do
to obviate the negative impacts of climate change, but with little help on how to
prioritize investments. “When everything is a priority, nothing is a priority.”
Environmental policy is replete with uncertainties, some with fat tail, i.e., low
probability but severe consequences, as when Hurricane Katrina hit New Orleans. The
existing policy tools—like net present value (NPV)—tend to be based on expected
values or expected utilities. The problem with these kinds of tools is that they see only
averages. They are not sensitive to the size and shape of the uncertainties, let alone fat
tails. That makes them poor instruments for climate change policy.
ROA is much more sensitive than NPV to the details of uncertainty. That has
been one of the major reasons for the appeal of ROA in investments under uncer-
tainty. At one point, some mistakenly went as far as predicting that ROA would
replace NPV as the main tool for investment decision. This did not happen. NPV and
ROA are not exclusive of each other but often complementary to each other. Still, in
the context of environmental policy, ROA is clearly superior.
To be able to use option valuation in climate change policy, one first needs to be
able to cope with uncertainties that do not proceed from a stochastic process. This is
possible and the subject of the next chapter.
Climate change policy is such a different world from corporate investments that,
to make ROA speak to it all, the fundamentals of the theory have to be revisited. The
practitioner should be able to recognize the anatomy and physiology of his or her
problem when applying that paradigm. Not only should it be user-friendly; it should
also be mathematically and conceptually transparent.

2.6 Foundations of Option Theory

2.6.1 Bachelier’s “Théorie de la Spéculation”

The PhD thesis (Bachelier 1900) of Louis Bachelier (1870–1946), entitled “Théorie
de la Spéculation,” is absolutely seminal for the theory of options. When Bachelier
died in 1946, he had not achieved much notoriety. The fact that Bachelier was
inspired to apply advanced math to finance at the time was an oddity. The part of
Bachelier’s thesis that was best received was his contribution to the mathematics of
stochastic processes. In 1900 this field was at a very primitive stage. Bachelier
16 2 Toward a General Theory of Real Options

completed his thesis before Einstein had developed the theory of the “Brownian
motion” in a paper published in 1905 (the same year he published his paper on
special relativity). The goal of Einstein’s paper was to “explain” mathematically an
experimental observation made in 1827 by the botanist Robert Brown that molecules
were moving randomly. Bachelier in his thesis assumed that the prices of shares
were undergoing a random walk, i.e., before the name existed, he assumed that
shares were following a Brownian process. Today, it is more popular to assume that
the prices of shares or commodity are following a geometric Brownian motion. This
is equivalent to saying that their rate of change is following a Brownian motion.

2.6.1.1 Bachelier Rediscovered

A bit like what happened to Shakespeare or Mozart, it took decades before people
realized the importance of Bachelier’s contribution. Allegedly the mathematical
statistician Jimmie Savage accidentally stumbled upon one of Bachelier’s papers
in the University of Chicago’s library sometime in the 1950s. He alerted, among
others, Paul Samuelson from MIT, who could not find the paper but found
Bachelier’s thesis in the MIT library (Bernstein 2005). The rest is history.

2.6.1.2 L’espèrance Mathématique du Spéculateur est Nulle

The seminal assumption of Bachelier’s PhD thesis, which captures the essence of the
valuation of options, financial, real, and otherwise, is best expressed in its original
French: “l’espèrance mathématique du spéculateur est nulle.” In English, this trans-
lates to the “mathematical expectation of a speculator is zero.” In other words, this
means that the value of an option is equal to the expected gain or loss (depending on
which side of the transaction one is on) of the speculator or investor. This is exactly
what the Black–Scholes formula for financial options captures. It is also true for real
options: their value is the expected benefit of an investment.

2.6.1.3 Black–Scholes

The Black–Scholes formula (Black and Scholes 1973) is a mega milestone in the
history of options. It is used widely and earned the Nobel Prize in 1997 for Myron
Scholes and Robert Merton (Fischer Black had passed away by then). The Black–
Scholes formula gives the value of European call or put options in the case where the
uncertainty on the value of the underlying asset proceeds from a particular stochastic
process, a geometric Brownian motion.
Bachelier, being the first to model the evolution of stock prices as a stochastic
process, assumed that the probability distribution function (PDF) of their future
values was a Gaussian distribution. That was in the spirit of the central limit theorem
and amounted to assume that the prices follow a Brownian motion. The prices of
assets, like shares or commodities, are better modeled by a geometric Brownian
Another random document with
no related content on Scribd:
The Project Gutenberg eBook of The band played
on
This ebook is for the use of anyone anywhere in the United States
and most other parts of the world at no cost and with almost no
restrictions whatsoever. You may copy it, give it away or re-use it
under the terms of the Project Gutenberg License included with this
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you are located before using this eBook.

Title: The band played on

Author: Lester Del Rey

Illustrator: John Schoenherr

Release date: September 13, 2023 [eBook #71628]

Language: English

Original publication: New York, NY: Royal Publications, Inc, 1957

Credits: Greg Weeks, Mary Meehan and the Online Distributed

Proofreading Team at http://www.pgdp.net

*** START OF THE PROJECT GUTENBERG EBOOK THE BAND

PLAYED ON ***
 The Band Played On

by LESTER DEL REY

Illustrated by SCHOENHERR

The Heroes' March was fitting for

most spacemen. Somehow, though, if just didn't
apply to a space-borne garbage man!

[Transcriber's Note: This etext was produced from

Infinity June 1957.
Extensive research did not uncover any evidence that
the U.S. copyright on this publication was renewed.]
 Lester del Rey says: "I've grown more
and more unhappy about the trend to
stories laid a thousand years ahead and
a megaparsec away. So every once in a
while, I like to sit down with an idea
where I can be pretty darned honest
about probable facts and see if some of
the old, basic, simple ideas can't be
twisted." He has a good point there, and
we think you'll agree he has succeeded in
his aim in The Band Played On.

CHAPTER I
Inside the rocket grounds, the band was playing the inevitable
Heroes' March while the cadets snapped through the final maneuvers
of their drill. Captain Thomas Murdock stopped at the gate near the
visitors' section, waiting until the final blatant notes blared out and
were followed by the usual applause from the town kids in the stands.
The cadets broke ranks and headed for their study halls, still stepping
as if the band played on inside their heads.
Maybe it did, Murdock thought. There had been little parade drill and
less music back on Johnston Island when his group won their rocket
emblems fifteen years before; yet somehow there had been a sense
of destiny, like a drum beating in their brains, to give them the same
spring to their stride. It had sent most of them to their deaths and a
few to command positions on the moon, long before the base was
transferred here to the Florida coast.
Murdock shrugged and glanced upwards. The threatening clouds
were closing in, scudding across the sky in dark blobs and streaks,
and the wind velocity was rising. It was going to be lousy weather for
a take-off, even if things got no worse.
Behind him, a boy's voice called out. "Hey, pilot!"
He glanced about, but there was no other pilot near. He hesitated,
frowning. Then, as the call was repeated, he turned doubtfully toward
the stands. Surprisingly, a boy of about twelve was leaning over the
railing, motioning toward him and waving a notebook emphatically.
"Autograph, pilot?"
Murdock took the book and signed the blank page automatically,
while fifty pairs of eyes watched. No other books were held out, and
there was complete silence from the audience. He handed the pencil
and notebook back, trying to force a friendly smile onto his face. For a
moment, there was a faint ghost of the old pride as he turned back
across the deserted parade ground.
It didn't last. Behind him, an older voice broke the silence in disgusted
tones. "Why'd you do that, Shorty? He ain't no pilot!"
"He is, too. I guess. I know a pilot's uniform," Shorty protested.
"So what? I already told you about him. He's the garbage man!"
There was no vocal answer to that—only the ripping sound of paper
being torn from the notebook.

Murdock refused to look back as the boys left the stands. He went
across the field, past the school buildings, on toward the main
sections of the base—the business part, where the life-line to the
space station and the moon was maintained. A job, he told himself,
was a job. It was a word he would never have used six ships and
fifteen years before.
The storm flag was up on the control tower, he saw. Worse, the guy
cables were all tight, anchoring the three-stage ships firmly down in
their blast deflection pits. There were no tractors or tankers on the
rocket field to service the big ships. He stared through the thickening
gloom toward the bay, but there was no activity there, either. The
stage recovery boats were all in port, with their handling cranes
folded down. Obviously, no flight was scheduled.
It didn't fit with predictions. Hurricane Greta was hustling northward
out to sea, and the low ceiling and high winds were supposed to be
the tag end of that disturbance, due to clear by mid-day. This didn't
look that way; it looked more as if the weather men on the station had
goofed for the first time in ten years.
Murdock stared down the line toward his own ship, set apart from the
others, swaying slightly as the wind hit it. Getting it up through the
weather was going to be hell, even if he got clearance, but he couldn't
wait much longer. Greta had already put him four days behind his
normal schedule, and he'd been counting on making the trip today.
There was a flash bulletin posted outside the weather shack,
surrounded by a group of young majors and colonels from the pilot
squad. Murdock stepped around them and into the building. He was
glad to see that the man on duty was Collins, one of the few
technicians left over from the old days on the Island.
Collins looked up from his scowling study of the maps and saluted
casually without rising. "Hi, Tommy. How's the hog business?"
"Lousy," Murdock told him. "I'm going to have a hungry bunch of pigs
if I don't get another load down. What gives with the storm signals? I
thought Greta blew over."
Collins pawed the last cigarette out of a pack and shook his head as
he lighted up. "This is Hulda, they tell me. Our geniuses on the station
missed it—claimed Hulda was covered by Greta until she grew
bigger. We're just beginning to feel her. No flights for maybe five days
more."
"Hell!" It was worse than Murdock had feared. He twisted the weather
maps to study them, unbelievingly. Unlike the newer pilots, he'd spent
enough time in the weather shack to be able to read a map or a radar
screen almost as well as Collins. "The station couldn't have goofed
that much, Bill!"
"Did, though. Something's funny up there. Bailey and the other brass
are holding some pow-wow about it now, over at Communications. It's
boiling up to a first-class mess."
One of the teletypes began chattering, and Collins turned to it.
Murdock moved outside where a thin rain was beginning to fall,
whipping about in the gusts of wind. He headed for the control tower,
knowing it was probably useless. In that, he was right; no clearances
for flight could be given without General Bailey's okay, and Bailey was
still tied up in conference, apparently.
He borrowed a raincape and went out across the field toward his
ship. The rain was getting heavier, and the Mollyann was grunting
and creaking in her pit as he neared her. The guying had been well
enough done, however, and she was in no danger that he could see.
He checked the pit gauges and records. She'd been loaded with a
cargo of heavy machinery, and her stage tanks were fully fueled. At
least, if he could get clearance, she was ready to go. She was the
oldest ship on the field, but her friction-burned skin covered sound
construction and he had supervised her last overhaul himself.
Then he felt the wind picking up again, and his stomach knotted. He
moved around to the more sheltered side of the ship, cursing the
meteorologists on the station. If they'd predicted this correctly, he
could have arranged to take off during the comparative lull between
storms. Even that would have been bad enough, but now....
Abruptly, a ragged klaxon shrieked through the air in a series of short
bursts, sounding assembly for the pilots. Murdock hesitated, then
shrugged and headed out into the rain. He could ignore the signal if
he chose, since he'd been on detached duty for years, except when
actually scheduled for flight; yet it was probably his best chance to
see Bailey. He slogged along while the other pilots trotted across the
field toward Briefing on the double. Even now, covered with slickers
and tramping through mud, they seemed to be on parade drill, as if a
drum were beating out the time for them.

Murdock found a seat at the rear, separate from the others, out of old
habit. Up front, an improvised crap game was going on; elsewhere,
they were huddled in little groups, their young faces too bright and
confident. Nobody noticed him until Colonel Lawrence Hennings
glanced up from the crap game. "Hi, Tommy. Want in?"
Murdock shook his head, smiling briefly. "Can't afford it this week," he
explained.
A cat could look at royalty; and royalty was free to look at or speak to
anyone—even a man who ferried garbage for the station. At the
moment, Hennings was king, even in this crowd of self-determined
heroes. There was always one man who was the top dog. Hennings'
current position seemed as inevitable as Murdock's own had become.
Damn it, someone had to carry the waste down from the station. The
men up there couldn't just shove it out into space to have it follow
their orbit and pile up around them; shooting it back to burn up in
Earth's atmosphere had been suggested, but that took more fuel in
the long run than bringing it down by ship. With nearly eight hundred
men in the doubly expanded station, there was a lot of garbage, too.
The job was as important as carrying the supplies up, and took just
as much piloting skill. Only there was no band playing when the
garbage ship took off, and there could never be a hero's mantle over
the garbage man.
It had simply been his bad luck that he was pilot for the first load
back. The heat of landing leaked through the red-hot skin of the cargo
section, and the wastes boiled and steamed through the whole ship
and plated themselves against the hull when it began to cool, until no
amount of washing could clean it completely; after that, the ship was
considered good for nothing but the carrying of garbage down and
lifting such things as machine parts, where the smell wouldn't matter.
He'd gone on detached duty at once, exiled from the pilot shack; it
was probably only imagination, but the other men swore they couldn't
sleep in the same room with him.
He'd made something of a joke of it at first, while he waited for his
transfer at the end of the year. He'd finally consented to a second
year when they couldn't get anyone else for the job. And by the end
of five years of it, he knew he was stuck; even a transfer wouldn't
erase his reputation as the garbage man, or give him the promotions
and chances for leadership the others got. Oh, there were
advantages in freedom, but if there had been anything outside of the
service he could do....
The side door opened suddenly and General Bailey came in. He
looked older than his forty years, and the expression on his face
sobered the pilots almost at once. He took his time in dropping to the
chair behind the table, giving them a chance to come to order.
Murdock braced himself, watching as the man took out a cigarette.
Then, as it was tapped sharply on the table to pack the end, he
nodded. It was going to be a call for volunteers! The picture of the
weather outside raced through his mind, twisting at his stomach, but
he slid forward on his seat, ready to stand at once.
"At ease, men." Bailey took his time lighting the cigarette, and then
plunged into things. "A lot of you have been cursing the station for
their forecast. Well, you can forget that—we're damned lucky they
could spot Hulda at all. They're in bad shape. Know what acrolein is?
You've all had courses in atmospherics. How about it?"
The answer came out in pieces from several of the pilots. Acrolein
was one of the thirty-odd poisons that had to be filtered from the air in
the station, though it presented no problem in the huge atmosphere
of Earth. It could get into the air from the overcooking of an egg or the
burning of several proteins. "You can get it from some of the plastics,
too," one of the men added.
Bailey nodded. "You can. And that's the way they got it, from an
accident in the shops. They got enough to overload their filters, and
the replacements aren't enough to handle it. They're all being
poisoned up there—just enough to muddle their thinking at first, but
getting worse all the time. They can't wait for Hulda to pass. They've
got to have new filters at once. And that means—"
"Sir!" Hennings was on his feet, standing like a lance in a saddle
boot. "Speaking for my crew, I ask permission to deliver whatever the
station needs."
Murdock had been caught short by Hennings' sudden move, but now
he was up, protesting. His voice sounded as hollow as he felt after
the ringing tones of the younger man. "I'm overdue already on
schedule, and by all rights—"
Bailey cut him off, nodding to Hennings. "Thank you, Colonel. We'll
begin loading at once, while Control works out your tapes. All right,
dismissed!" Then finally he turned to Murdock. "Thanks, Tom. I'll
record your offer, but there's no time for us to unload your ship first.
Afraid you're grounded for the storm."
He went out quickly, with Hennings following jauntily at his heels.

The others were beginning to leave, grumbling with a certain

admiration at Hennings' jumping the gun on them. Murdock trailed
along, since there was no chance for him to change the orders now.
He wondered what excuse would have been used if he'd been first to
volunteer and if his ship had been empty. The choice of pilot had
probably been made before the token request for volunteers, and he
was certain that his name hadn't been considered.
The storm seemed to have let up when he started across the field,
but it was only a lull. Before he could reach the shelter of the weather
shack, it began pelting down again, harder than ever. He stopped
inside the door to shake off some of the wetness. Collins was intently
studying one of the radar screens where a remote pickup was
showing conditions, alternately working a calculator and yelling into a
phone. He looked up, made a desperate motion with his fingers for a
cigarette, and went back to the phone.
Murdock shoved a lighted smoke toward him, then pulled a stool up
to the window where he could watch the field. By rights, he should be
heading back to his farm, to do what he could there; but he had no
intention of leaving before the take-off. Lifting a ship in this weather
was mostly theory. It had been done once on the Island, but the big
ships were still too unstable to make it anything but a desperate
emergency measure. He'd discussed it with the pilot after that trip,
and he'd spent a lot of time trying to work out a method in case he
had to try it, but Hennings had his sympathy now. It took more than
courage and confidence to handle this situation.
He studied the storm, trying to get the feel of it. During his first two
years back here, he'd spent a lot of his free time flying a light plane,
and some of the weather had been fairly bad. It gave him some idea
of what Hennings had to face; he wondered whether the younger pilot
realized what was coming.
Sodium lights were blazing on the field, he saw, clustered about
Hennings' Jennilee, and men were slipping and sliding around in the
mud, getting her ready and loading the filter packs. Two men were
being run up on a lift to the crew entrance; Hennings carried both a
co-pilot and a radio man, though many of the pilots now used only a
single crewman.
Collins looked up from the phone. "Fifteen minutes to zero," he
reported.
Murdock grunted in surprise. He'd expected the take-off to be two
hours later, on the next swing of the station. It must mean that orders
for loading the ship had been given before Bailey came into Briefing.
It confirmed his suspicion that the pilot had been picked in advance.
A few minutes later, Hennings appeared, marching across the field
toward the lift in the middle of a small group. Several of them rode up
with him. As the lift began creaking backward, the pilot stood poised
in the lock, grinning for the photographers. Naturally, the press had
been tipped off; the service had learned long before that maximum
publicity helped in getting the fattest possible appropriations.
When the lock was finally sealed and the field cleared, Murdock bent
over the counter to study the radar screens. The storm was
apparently erratic, from the hazy configurations he could see. Zero
would be a poor choice for the take-off, though, from what he could
estimate. Hennings would be smarter to delay and make manual
corrections on his tape.
Then the klaxon went on, signalling the take-off. The last man on the
field was darting for cover. From the blast pit, a dull, sickly red began
to shine as the rockets were started. Murdock swore. The fool was
taking off on schedule, trusting to his tapes!
The smoky red exhaust ran up the spectrum to blue, and the ship
began to tremble faintly. The sound rose to crescendo. Now the
Jennilee started to lift. Wind hit it, throwing it toward the side of the
pit. The wings of the top stage caught most of the force, and the
whole ship was tilting—the worst thing that could happen. They
should have swivelled the ship around to put the wings parallel to
most of the storm, instead of bucking it.
Murdock heard Collins' breath catch harshly, but suddenly the worst
danger was over. A lull for a second or so gave Hennings his chance.
He was at least riding his controls over the automatics. The blast
deflection vanes shot the blue flame sidewise, and the ship shifted its
bottom, righting itself. It was beginning to make its real climb now.
The wings near the top literally vibrated like the arms of a tuning fork,
and the blast trail was ragged. Yet she rose, her blast roar rising and
falling as the wind altered, blowing some of the sound away from the
watchers.
Now the Doppler effect began to be noticeable, and the sound
dropped in pitch as the Jennilee fought her way up. The overcast of
scudding clouds hid all but the bright anger of the exhaust.
Murdock turned with the technician to another radar screen. Unlike
those in Control, it wasn't set properly to catch the ship, but a hazy
figure showed in one edge. "Right into some of the nastiest stuff
blowing!" Collins swore.

CHAPTER II
He was right. The timing had been as bad as possible. The blob of
light on the screen was obviously being buffeted about. Something
seemed to hit the top and jerk it.
The screen went blank, then lighted again. Collins had shifted his
connections, to patch into the signal Control was watching. The blip
of the Jennilee was now dead center, trying to tilt into a normal
synergy curve. "Take it up, damn it!" Murdock swore hotly. This was
no time to swing around the Earth until after the ship was above the
storm. The tape for the automatic pilot should have been cut for a
high first ascension. If Hennings was panicking and overriding it back
to the familiar orbit....
As if the pilot heard him, the blip began rising again. It twisted and
bucked. Something seemed to separate from it. There was a
scattering of tiny white dots on the screen, drifting behind the ship.
Murdock couldn't figure them. Then he forgot them as the first stage
let go and began falling backward from the ship, heading on its great
arc toward the ocean. Recovery would be rough. Now the second
stage blasted out. And finally, the ship was above the storm and could
begin to track toward its goal.
Abruptly the speaker in the corner snapped into life, and Hennings'
voice sounded from it. "Jennilee to Base. Cancel the harps and
haloes! We're in the clear!"
Collins snapped his hand down against a switch, killing the speaker.
"Hotshot!" he said thickly, and yet there was a touch of admiration in
his voice. "Ten years ago, they couldn't build ships to take what he
gave it. So that makes him a tin god on wheels. Got a cigarette,
Tommy?"
Murdock handed him the package and picked up the slicker again.
He'd seen enough. The ship should have no further trouble, except
for minor orbital corrections, well within the pilot's ability. For that
matter, while Collins' statement was true enough, Hennings deserved
a lot of the credit. And if he had to boast a little—well, maybe he
deserved credit for the ability to snap back to normal after the
pounding his body and nerves must have taken.

In the recreation hall, some of the pilots were busy exaggerating the
dangers of the take-off for the newsmen, making it sound as if no
parallel feat had been performed in all history. Murdock found a
phone where he had some privacy and put through a call to let Pete
and Sheila know when he'd be back—and that he was returning
without a load. They'd already heard the news, however. He cut the
call short and went out across the soggy field, cursing as his shoes
filled with water. From the auditorium of the school, he could hear the
band practicing; he wondered for a moment whether the drumbeat
could make the cadets feel like heroes as they moved through mud
with shoes that squished at every step. It had no such lifting effect on
him.
The parking lot beyond the drill grounds was almost deserted, and his
big truck seemed to huddle into the wind like a lonely old bull buffalo.
He started the turbine and opened the cab heater, kicking off his
sodden shoes. The dampness in the air brought out the smell of
refuse and pigs from the rear, but he was used to it; anyhow, it was
better than the machine-human-chemical stench of the space station.
Driving took most of his attention. The truck showed little wind-sway
and the roads were nearly deserted, but vision was limited and the
windshield kept steaming up, in spite of the silicone coating. He
crawled along, grumbling to himself at the allocation of money for
tourist superhighways at the expense of the back roads.
A little ways beyond the base, he was in farm country. It was totally
unlike the picture of things he'd had originally. He'd expected only
palm trees and citrus groves in Florida, though he'd known vaguely
that it was one of the major cattle-producing states. This part wasn't
exactly like the Iowa section where he'd grown up, but it wasn't so
different, either.
Pete Crane had introduced him to it. At the time, Pete was retiring
after twenty years of service and looking for something to do. He'd
found a small farm twenty miles from Base and had approached
Murdock with the hope of getting the station garbage for food for the
hogs he planned to buy. The contractor who took care of the Base
garbage wouldn't touch the dehydrated, slightly scorched refuse, and
disposal had always been a problem.
They ended up as partners, with permanent rights to all the station
wastes. Pete's sister, Sheila, joined them to keep house for them. It
beat living in hotels and offered the first hope for the future Murdock
had. Unless his application for Moon service was accepted—which
seemed unlikely, since he was already at the age limit of thirty-five—
he had no other plans for his own compulsory twenty-year retirement.
The farm also gave some purpose to his job as garbage collector for
the station.
For two years, everything went well. Maybe they grew over-confident
then. They sank everything into new buildings and more livestock.
When the neighboring farm suddenly became available, they used all
their credit in swinging the mortgage, leaving no margin for trouble.
And trouble came when Pete was caught in front of a tractor that
somehow slipped into gear; he was hospitalized for five weeks, and
his medical insurance was only enough for a fraction of the cost.
Now, with Hulda cancelling the critically necessary trip to the
station....

The truck bumped over the last half mile and into the farm-yard.
Murdock parked it near the front door and jumped out. He let out a
yell and made a bee-line for the kerosene heater, trying to get his feet
warm on the floor near it. The house was better built than many in
Florida, but that wasn't saying much. Even with the heater going, it
was probably warmer in their new pig sty.
Sheila came through the dining room from the kitchen, spotted his
wet feet, and darted for his bedroom. In a second she was back with
dry clothes. "Change in here where it's warm. I'll have lunch ready in
a couple of minutes," she told him, holding her face up for a kiss.
Sheila wasn't a beautiful woman and apparently didn't care.
Murdock's mother would probably have called her plain good looks
"wholesome," and referred to her slightly overweight body as
"healthy." He only knew that she looked good to him, enough shorter
to be comfortable, eyes pleasantly blue, and hair some shade of
brown that seemed to fit her.
He pulled her to him snugly, but she wriggled away after a brief kiss.
"Pete's in town, trying to get help. He'll be back any minute," she
warned him.
He grinned and let her go. They'd gone through the romantic binge of
discovering each other long enough ago to be comfortable with each
other now, except for the occasional arguments when she didn't want
to wait. Mostly, though, she had accepted their agreement. In eight
more months he'd be thirty-six and too old for assignment on the
Moon; if he didn't make that, they'd get married. But he had no
intention of leaving her tied to him if he did leave, since the chance of
taking her along was almost nil. Pete had backed him up on his
decision, too.
He slipped into coveralls and dry boots and went out to the dining
room, where a hot meal was waiting. At least their credit was good at
the local grocery between paydays. He filled her in on what had
happened while they ate. At the hour mark, he switched on the
television to the news. It was filled with the station emergency and
rescue, of course. Most of it seemed to be devoted to pictures of
Hennings entering the ship and a highly colored account of the flight.
But at least he learned that the flight had been completed. It made
good publicity for the service. A sound track of a band playing the
Heroes' March had been spliced into the movies. Maybe that was
good publicity, too. He had to admit that Hennings fitted the music
better than he could have done.
For a moment, the racket of the wind outside died, and another sound
reached his ears. The hogs knew it was past feeding time and were
kicking up a fuss. Murdock grimaced. He shoved away from the table,
feeling almost guilty at having stuffed himself, and dug rain clothes
out of the back closet. He hated going out in the weather again, but
the animals had to be pacified.
They heard him coming and set up more of a racket. He bent against
the wind and made a dash for it, getting his feet wet again in a
puddle. But the inside of the building was warmer than the house, as
he had expected. He lifted the cover of the mash cooker and began
ladling out the food into the troughs. His pail was scraping the bottom
of the cooker, while the sleek Poland China hogs fought and shoved
toward the spot where he was emptying it. They'd been on half
rations since yesterday, and they were obviously hungry.
He stopped when he had used half of what was in the cooker and
headed for the next building. On the way, he paused for a futile look
in the big storage shed, but he knew the answer. Pete had used the
last bag of grain in cooking the day's food. They'd exhausted the last
of the waste from the station earlier and had to fall back on the
precious commercial feed usually only used as a supplement. Damn
Greta and double damn Hulda! If the weekly predictions had been
right, he could have wangled clearance for a flight ahead of schedule,
before the storms, and they wouldn't be in this mess.
It was worse in the brooder house. The sows seemed to know that
milk for their sucklings depended on their feeding. They received a
somewhat larger portion, but it disappeared from the troughs as he
watched. The animals fought for the last scraps and then began
rushing about looking for more. They were smart enough to know he
was the source of it, and they stared at him, expressing their
demands in eloquent hog language. They weren't like other animals.
Cows were too stupid to realize they'd been gypped, sheep were
always yelling even when things went well. But hogs could pretty
nearly swear in English when they felt robbed, as these did. Even the
sucklings were squealing unhappily in sympathy with their mothers.

Murdock heard the door open behind him and turned to see Pete
coming in, drenched to the skin. He looked worn out, and his back
was still stiff from the accident, though he'd made a fine recovery. "Hi,
Tom. Sis told me what happened at the field. Good thing, too. This
stuff's no good for flights. How long till it clears?"
"Five days!" Murdock told him, and saw the older man flinch. The
hogs might not starve to death in that time, but they'd suffer, as well
as losing weight that would be hard to put back. He had no idea of
how it would affect the milk supply for the little pigs, and he didn't
want to guess.
They left the squealing hogs and slogged back to the house to
change before Pete would report on his luck in town. It seemed to be
all bad. They could get a loan against the mature hogs or they could
sell some, but with the week-end coming up they would have to wait
for money until they would no longer need it. Their credit at the only
feed and grain store was used up.
Murdock frowned at that. "You mean Barr wouldn't let us have
enough to carry us over in an emergency like this? After all our
business with him?"
"Barr's gone north on some business," Pete reported. "His brother-in-
law's running things. Claims he can't take the responsibility. Offered
to lend me twenty bucks himself if I needed it, but no credit from the
store. And he can't locate Barr. Darn it, if I hadn't had to get in front of
that tractor—"
"If!" Sheila snorted. "If I hadn't insisted you two pay the hospital in full,
or if I hadn't splurged on spring clothes.... How much can we get for
my car?"
Pete shrugged. "About half enough, but not till maybe Tuesday or
Wednesday, after title transfer. I already asked at Circle Chevy. How