Risks are inherent in customized product development for both customers and manufacturers due to their
inability to accurately articulate requirements and estimate costs, respectively. The presence of risks creates
transactional barriers when decision makers are risk averse. Prototyping, commonly used for customer
requirements elicitation and manufacturing cost estimation, is interpreted in this paper as a means of risk
reduction and modelled via a Bayesian estimation process. A quantitative risk model is subsequently developed
to investigate the investment decision upon prototyping, taking into consideration the fidelity and cost of the
prototype. This paper provides a decision framework for practitioners to understand and manage transaction
risks in customized product development.