Combined Stochastic Process and Value at Risk: A Real-World Information System Decision Case

Abstract

In this study, we used a combined stochastic process and value-at-risk (VaR) method to examine an electronic commerce expansion decision. By modeling uncertain benefits as a stochastic process, maximum losses of alternative decisions were quantified and compared to help managers to make information system/information technology (IS/IT) project decisions. Our results, based on the maximum loss perspective, demonstrated that uncertainty plays a critical role in evaluating IS/IT projects. More importantly, the results illustrate that VaR serves as a useful tool in decision-making for managers to quantify the value of maximum possible loss and to help them reach decisions.

Keywords

• information system
• stochastic process
• uncertainty
• value at risk (var)