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Looking at the Management of the COVID-19 Lockdown Through the Lens of Real Options Analysis

Whether we like it or not, imposing or lifting the lockdown is about striking an optimal balance between the economic cost of the lockdown and the value of the lives saved by “flattening the curve” and not overburdening the health system. Given the tremendous amount of uncertainty involved, striking the balance between economic costs and lifes saved is a challenging task.

Decision-makers can choose to lift the lockdown for specific regions or economic sectors progressively. They can even decide to overturn their decision depending on the evolution of the virus. Many strategies are available, but how do we choose the right one? Also, by acting progressively, authorities can learn more about the spread of the virus and adjust future actions. Learning has value. Real Options Analysis (ROA) is a framework to help structure an optimal strategy. We aim here to describe carefully and non-technically the ingredients of the real option approach, which is useful in deconstructing a project or course of action into sub-components and assessing the value and cost of such courses of actions along a decision path.

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