Real options analysis (ROA) and dynamic adaptive policy pathways (DAPP) were integrated to develop a dynamic adaptation pathway and identify robust adaptation options. ![]() This study developed an integrated modeling framework that extends previous studies to the spatial domain to assess the future flood risks and the cost and benefit of three adaptation measures for four types of buildings in Shanghai. Flexibility and robustness can be used to deal with future uncertainty. Long-term flood risk adaptation and decision making are complex because the future is full of deep uncertainties. Overall, we recommend that studies evaluating adaptation strategies should integrate cost–benefit analysis frameworks with adaptation pathways since this allows for better informing decision makers about the robustness and economic desirability of their investment choices. However, we identified ‘investment tipping points’, after which a transition could decrease the economic efficiencies of a pathway significantly. ![]() Results for different sea level rise scenarios show that applying adaptation pathways can result in higher economic efficiency (up to 10%)than individual adaptation strategies, despite the loss of efficiency at the initial strategy. Our method is illustrated for Los Angeles County which is vulnerable to flooding and sea level rise. Our approach accounts for uncertainty in sea level rise projections by allowing for flexibility of adaptation strategies over time. This study presents a comparative economic evaluation method for flood adaptation measures, which couples a cost–benefit analysis with the concept of adaptation pathways. Sea level rise and uncertainty in its projections pose a major challenge to flood risk management and adaptation investments in coastal mega cities. Lower scenarios may be used when alternatives offer future flexibility. On basis of this study, we give general recommendations to use high discharge scenarios for the design of measures with high fixed costs and few alternatives. Decisions trees have to be generated and stakeholders' preferences have to be translated into decision rules. In particular, relevant sources of uncertainty need to be recognized, quantified, integrated and discretized in scenarios, requiring subjective choices and expert judgement. We found several limitations of applying the ROA. The ROA for a realistic case requires a high level of geographical detail, a large ensemble of scenarios, and the inclusion of stakeholders' preferences. We benchmark the results of ROA against those of a standard cost‐benefit analysis and show ROA's potential policy implications. ![]() ![]() We develop robust dike investment strategies and value the flexibility offered by additional room for the river measures. We illustrate how ROA identifies optimal short‐term investments and values future options. In this paper we investigate benefits and limitations of a ROA, by applying it to a realistic FRM case study for an entire river branch. Although its potential benefits are large, ROA is hardly used in todays' FRM practice. Real options analysis (ROA) provides a welfare‐economics framework to design and evaluate robust and flexible FRM strategies under risk or uncertainty. Decisions on long‐lived flood risk management (FRM) investments are complex because the future is uncertain.
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