# A Real Option Pricing Decision of Construction Project under Group Bidding Environment
###### Abstract
Based on the incomplete information game theory, [PERSON] and [PERSON] established models from the perspective of a static game of bidders and a dynamic game of supervision, bidding and tendering [13; 14]. [PERSON] compared three learning algorithms of multiplicative weight, exponential weight and Roth-Eev. He simulated two different bidding strategies and constructed a research method based on algorithmic game theory [15]. The bidding psychology model believes that the bidders show bounded rationality in the actual bidding process. Their decisions are often consistent with decisions considering psychological and behavioral factors. For loss aversion behavior, [PERSON] and [PERSON] proposed a multi-price scheme decision method based on prospect theory and expected profit function in the discrete and continuous states of competitor bidding prices, respectively [16; 17]. For the regret aversion behavior, [PERSON] pointed out that bidders will lower the average when they are sensitive to the winner's regret and raise the average when they are more sensitive to the loser's regret [18]. To consider other effective factors besides price in the bidding decision, the multi-objective decision model can be introduced to balance probability, risk and profit scientifically. [PERSON] analyzed the key risk factors of bidding price comprehensively according to the characteristics of projects [19]. Moreover, [PERSON] systematically introduced five main decision-making methods for bidding price under the condition of multi-objective decision making, namely the Analytic Hierarchy Process (AHP), Artificial Neural Network (ANN), Fuzzy Evaluation (Fuzzy), Expert System (ES) and Case-Based Reasoning (CBR) [20]. In summary, the existing models do not consider the bidding policy and group competition environments that keep pace with the times. There is still room for improvement in the direct application of the research results to the bidding prices. The real option refers to the use of real assets (such as investment projects) as the subject matter, arguing that the cost of investment is unstable and irreversible. These uncertainties should be effectively used to analyze investment methods and adjust investment management decisions. It can be seen that the real option theory is of great significance for the enterprises to estimate the underlying value effectively. At present, this pricing theory is mostly applied to the valuation of projects with high risk. [PERSON] et al. used the compound option model to embed the flexibility of the investment scale in the life cycle of large photovoltaic projects into the project valuation, to evaluate the reliability of the project investment [21]. [PERSON] et al. proposed a real option model for renewable energy investment and evaluated the investment value and optimal timing of solar photovoltaic power generation in China [22]. Many projects also incorporate the flexibility of managers' decisions and the irreversibility of project investment into the theoretical model of real option pricing, which is used to improve investors' returns and reduce investment risks. For example, the solar power plant investment, the ARMG low-carbon transformation investment optimization, mining rights value evaluation, etc. [23; 24; 25]. However, construction projects have the characteristics of large investment scale, high investment risk and many uncertain factors, which must meet the conditions for the use of the real option. Meanwhile, the characteristics of long construction period, unpredictable and unrecoverable construction costs accord with the irreversibility and decision-making flexibility of real option theory. In the current bidding decision making, there is a lack of a mature model which can provide direct support based on the real option pricing theory under the group bidding environment. Therefore, the main contributions of this research to the price decision making of construction projects are as follows: the Black-Scholes real option pricing theory [26] is applied to the group bidding environment.