Adapting to climate change and managing climate risks by using real options

Adapting to climate change and managing climate risks are new challenges for farmers, community leaders, and catchment management authorities. To meet this challenge, a new method of making decisions under risk may help. This method is called real options. It begins with common sense and adds rigour. It helps us decide when to keep our options open and when to foreclose options and create new ones. In this paper, real options are explained and applied to several examples by developing a new type of decision diagram. The diagrams are a language for thinking about complex decisions under risk. Farmers, community leaders, and catchment management authorities can develop similar diagrams and use them to communicate with other decision makers and with researchers. Finally, the decision diagrams are related to new mathematical tools to help find optimal decisions for managing climate risks.