Need training, coaching, or help leading an agile transformation?
email: mike@cottmeyer.com or call: 404.312.1471

Wednesday, July 8, 2009

I'd Rather Be Wrong!

"If you choose not to decide, you still have made a choice" - Geddy Lee, Rush

Real Option theory tells us that our choices have value. In other words... the choices we make have an economic impact. Real Options also tells us that our options expire. That means we don't have an unlimited amount of time to make a decision. Playing the Real Options game involves figuring out just how long our options will be available... and using that time to gather as much information as possible... so we can make a better decision.

Earlier this year my wife and I were faced with a pretty tough decision. We were trying to figure out where to send our kids to school. The previous few years we had been running a small private school and our kids went there. We decided that our school was too much effort to run and no longer the best educational alternative for our kids... so we had a decision to make.

As we were trying to figure all this out... we identified three primary options that met with our educational goals... and were in alignment with our personal finances:

  1. Continue to run our current school and send our kids there
  2. Send our kids to a top notch public school that was nearby but out of our district
  3. Send our kids to the nearby public school

Back in January we needed a plan but didn't have all the information. The pressure was mounting because if we wanted to pursue option #2, we had to apply and pay a rather hefty deposit. Pay the deposit and the option stays open... don't pay the deposit and the option expires. We decided to pay the deposit... not because we were sure we wanted to pursue option #2... but because it was worth the money to keep the option open a little longer while we figured things out.

What made the discussion interesting... and maybe even relevant our discussion here around barriers to agile adoption... was the difference between how I handle uncertainty and how my wife handles uncertainty. I am definitely the risk taker in our marriage... my wife likes to keep things pretty stable. On most things that is a great balance.... but sometimes when it comes to assessing risks and the best way to manage risk... sometimes we don't see eye to eye.

My wife's initial reaction was to commit to option #2... communicate our decision to disband option #1... and eliminate option #3 from consideration. The problem was that if option #2 didn't work out we would no longer have option #1 available. There was no economic value to locking in our decision early... but my wife's need for certainty would have caused us to commit before we had all the information. By waiting... by purchasing more time... we ended up with more information and that helped us make a more informed decision.

Its that fundamental need for certainty... and it is a need... is what makes the conversation difficult.

As a community... we are trying to get folks to embrace change and to embrace uncertainty. We've got to recognize that we might be asking folks to embrace more uncertainty that they can likely handle. The reality is simply that many folks would rather be wrong than be uncertain. If you are working with folks that are not risk takers... if you are working with people that value operating in highly predictable environments... Real Options can give you language to help them see value in deferring some subset of their decisions.

Making decisions early has an economic impact to our projects. If we can quantify that cost in terms of real dollars and risk probability... we might have a chance to change how people think about change and uncertainty.

Understanding Real Options - Mike Cottmeyer, July 2008

Subscribe to Leading Agile

4 comments:

  1. I think there is another piece to this. Some people make the mistake of looking at the deposit as part of your future decision. For example, option 2 and 3 are even, but because we paid the deposit... we should not waste it and choose #2.

    The deposit was a payment to extend time (as you described). Some people forget this and see it as a partial payment of the total cost and can't let go of it.

    This is how companies keep projects going that should be killed because "they already spent 12 million dollars on it". My response is, "and you want to waste another million?".

    I was once told that the main rule of an MBA education is you decide what to do moving forward based on costs/profit moving forward, not money already lost.

    Good post!

    ReplyDelete
  2. Good point Kevin. I took a course a while ago through Georgia Tech... it was like a 12 week 'MBA light'. They talked about 'sunk costs' and how you cannot let sunk costs influence your future decision making.

    ReplyDelete
  3. So what did you choose in the end, Mike? :)

    About whether it makes sense to delay things indeed:
    At times people who want to make the decision much quicker in fact have all the information already (ok, 95% of info) subconsciously, without realizing it. Then if you ask them to delay decision, well, gathering more info can only annoy them and take time from doing other important things. Certainly, it can only happen if the person knows the topic well already.

    ReplyDelete
  4. Artem - We ended up going with option #2, the one we purchased time to keep open.

    Regarding your point... the benefit of understanding when your options expire... and delaying your decision until closer to the expiry... allows you time to gather MORE information.

    Sometimes you might *think* you have all the information... the problem is that you don't know the value of options that might come up while you are waiting.

    ReplyDelete