Real Options: making decisions¶

The Real Options approach provides clarity when decisions need to be made. It can be invaluable to ensure the right thing is done at the right time for the most value.

Real Options start with three key ideas:

• Options have value
• Options Expire
• Never commit early unless you know why

Real options approach can be used for business and technical decisions alike.

Real options are literally everywhere. Anything you can do without the obligation to do it is a real option: phoning a friend, buying a house, finding a new job, walking up to a stranger, travelling to Cuba.

As soon as you understand this, you’ll see them everywhere. No worries, relax. You don’t have to manage them all, only those most important to you.

Consider all work as optional is a far more natural approach to structuring work and avoids it feeling like an ever increasing burden (e.g. a huge backlog of tickets).

Work should only be done when it will lead to an expected value.

Work should have a sense of chronological time for when it is valuable.

Options Have Value¶

An option is a choice. It is a decision to select one strategy over another strategy.

• buy one product over another product
• build one feature over another feature
• choose one programming language over another
• choose a tech stack over another
• decide on one course of action over another course of action

Not only the value of the benefit received (intrinsic value), but also the fact that you still have an option has value above the intrinsic value.

Being able to choose later is valuable. This value is higher when there is more uncertainty.

Every choice we make has the possibility to yield a particular return on our investment. Our goal is to maximize the value that we derive from our decision making.

The decisions we know we need to make have value, so do the decisions we know about (yet).

The value of the known options can be expressed (sometimes with a bit of effort), but we can’t know the value of an option that isn’t there yet.

We need time to learn about what we don’t know. We need time to understand the value of the unknown.

Options Expire¶

At some point the option is no longer available. It expires either based on time passing or that other events have happened making it no longer possible to use a particular option.

The most important thing to keep track of with real options is the expiry condition(s). Under what condition is an option no longer available.

Options have value, but that value does not live forever, it expires. We cannot wait indefinitely to make a decision and we can’t wait until we know everything (e.g. analysis paralysis).

At some point in time, the window of opportunity for a particular option will close, and the value of that choice will no longer be available to us.

Our goal is to keep our options open until the point they are ready to expire. We use that time to gather more information and to learn about new options that might present themselves.

Waiting to the last responsible moment, before the option is ready to expire, allows us to make decisions when we have the most possible information available to us. Decisions cannot be held indefinitely… but they can be deferred.

Never commit early unless you know why¶

Committing to an option is when you decide to do something and it is no longer optional, but an obligation / commitment.

Making a commitment removes an option to realize some value / benefit.

With real options it is important to understand why one option was removed to create another.

It is not about committing as late as possible as that might expose one to higher and unnecessary risks. It is about gathering as much information in the time available and trying to push to expiry conditions to a later date or knowing why you commit earlier than the expiry.

Most people want to make good decisions. Unfortunately, most people would rather make a wrong decision than to live with uncertainty.

This was probably the most clarifying concept I learned during my time with Chris and Olav. We would rather be wrong than to defer a decision. Our need for certainty drives us to make decisions before we have to. Sometimes it drives us to make bad decisions.

Waiting helps us make better decisions. Knowing how long we can wait helps us be more disciplined about waiting. Using Real Options theory can help us determine how long we can wait.

If you need to make an early decision, the key is to understand why. Don’t make a decision early for the sole purpose of making the decision. Wait and gather more information. If there is a good reason to make the decision early, and you are comfortable with the outcome, make the decision.

Sometimes there are good reasons for making an early decision. If the value of the option is low or of little risk, you might consider making an early decision. In that case you are making the decision to focus your energy on higher value options. Alternatively, if a situation is high risk and making an early decision would yield an acceptable outcome, that might be a good time to make a decision early. Making the decision would mitigate risk.

Understand why you are making the decision and be aware the limits that decision will place on any current or future options.

So… that is my take on Real Options. If any of you are experts on this topic, please weigh in. I found the concept intriguing and wanted to share with you my understanding.

Commitment - a novel about managing project risk

Keynote: Risks and Decisions. The When and Not the How (with Olav Maassen)

Have you ever wondered why some practices feel Agile and some do not? What do Executive Tools like Scenario Planning have in common with Test Driven Development and Retrospectives. Why do some Agile practices like Explicit WIP Limits and Retrospectives feel right for a while but then start to feel wrong? How do you make Agile practives relevant for Finance and the HR Department? Why do some people have such a strong reaction against Agile and what can you do about it? How do you stop your management from making the wrong decisions? How can I help my executives develop a a risk management framework that scales from the top to the bottom of the organisation? How will this help you avoid frustrating methodology audits?

The answer to all of these questions is Real Options. Real Options is a process that helps you understand WHEN to make decisions rather than HOW to make decisions. Timing is everything, however deferring commitments causes stress to many people. Real options helps you manage that stress by creating bounded uncertainty in an context of total uncertainty. This is not a simple process that you copy and learn to adopt through practice. This is a new way at looking at the world around you that starts by learning to differentiate between options and commitments. You will then learn which processes adopt real options and which do not... and how to change the ones that do not.

As well as helping you optimise and manage your processes at work, real options will help you manage stress and uncertainty in your personal lives. You will hear tales about Brides using Real Options to manage their Wedding Day, and Parents who used Real Options to manage stressful times in their Children's education.

Examples of processes created using Real Options include Behaviour Driven Development, Feature Injection, Latent Code Patterns, Staff Liquidity and The Real Option Risk Management Process. In addition, Real Options explain the effectiveness of TDD, Short Iterations and many other Agile Processes.

This keynote will be delivered in Olav and Chris's popular entertaining style. The focus will be on fun, with learning dropped in as a sub-plot. There will be Tradegy and Comedy, Horror and possibly Romance ( but only if Olav is feeling frisky on the day ). Although Olav and Chris love theory, they really only value those theories that have been proven through practice.

Olav and Chris are currently working on a Graphic Novel about Real Options called "The Commitment". This ground breaking experiment will attempt to deliver learning in a format that best suits the reader rather than the writer. Olav and Chris have published many articles on Real Options and Risk Management on a number of We-site, most notably www.infoq.com. Olav and Chris are respected ( and despised ) practitioners in the Agile and Lean Community. They are first followers who have helped to form and incubate many communities including the Behaviour Driven Development and Kanban Communities.