Species preservation and biodiversity value: a real options approach

We evaluate biodiversity in a real options framework, when the resources in use are substitutable. We examine optimal conservation decisions given that a biodiversity loss is irreversible and that future use values are uncertain. While species substitutability has been shown to reduce the value of diversity, we show that the flexibility associated with substitutability is a source of value. Marginal species value is decreasing in the number of species, but rising and convex in the value of the marginal species. As we show in the two-species homogenous model, increased volatility raises biodiversity value, and a positive correlation between species values both reduces the value of the pool of species and the value of biodiversity. The role played by the correlation between the value of a species and the value of other species, is reminiscent of the Beta of a financial asset. Just like an asset with a negative Beta derives additional value by providing insurance against fluctuations in the market portfolio, a species whose value tends to move in the opposite direction as the species in use derives additional value from its higher probability to be available for substitution if the value of the species in use diminishes.