Center-of-Gravity Real Options Method Based on Interval-Valued Fuzzy Numbers

Jani Kinnunen*, Irina Georgescu, Mikael Collan

*Corresponding author for this work

    Research output: Chapter in Book/Conference proceedingConference contributionScientificpeer-review

    4 Citations (Scopus)


    This paper introduces an extension to the center-of-gravity fuzzy pay-off method, CoG-FPOM by Borges and others from 2018 meant for the valuation of real options by using interval-valued fuzzy numbers. The CoG-FPOM was developed as a response and a remedy to the identified inconsistency with financial theory in the original fuzzy pay-off method for real option valuation (FPOM). The use of interval-valued fuzzy numbers introduced in this paper allows taking into account a higher level of uncertainty and imprecision than is possible with the original CoG-FPOM model. This higher level of uncertainty can be encountered in many application areas. The proposed approach builds on using triangular upper and lower membership functions of fuzzy numbers, which represent expected pay-off distributions. The applicability of the CoG-FPOM in high uncertainty situations is improved by allowing the use of ranges instead of single numbers when inputting values for scenarios. An illustrative numerical application is presented in the context of mergers and acquisitions, where an acquiring company may receive options to abandon that is, rights to divest non-core business units acquired together with the desired parts of a target company. The model outcomes will be discussed and compared with the results from other pay-off-based fuzzy real option valuation models including the original FPOM.

    Original languageEnglish
    Title of host publicationIntelligent and Fuzzy Techniques
    Subtitle of host publicationSmart and Innovative Solutions - Proceedings of the INFUS 2020 Conference
    EditorsCengiz Kahraman, Sezi Cevik Onar, Basar Oztaysi, Irem Ucal Sari, Selcuk Cebi, A. Cagri Tolga
    Number of pages9
    ISBN (Print)9783030511555
    Publication statusPublished - 2021
    MoE publication typeA4 Article in a conference publication
    EventInternational Conference on Intelligent and Fuzzy Systems, INFUS 2020 - Istanbul, Turkey
    Duration: 21 Jul 202023 Jul 2020

    Publication series

    NameAdvances in Intelligent Systems and Computing
    Volume1197 AISC
    ISSN (Print)2194-5357
    ISSN (Electronic)2194-5365


    ConferenceInternational Conference on Intelligent and Fuzzy Systems, INFUS 2020


    • Center of gravity
    • Fuzzy pay-off method
    • Interval-Valued fuzzy numbers
    • Mergers and acquisitions
    • Possibility theory
    • Real option


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