But what if I already know everything!?

But hang on a sec! You might be thinking that you have all the information you need... and if I have all the information I need... there is no need to hold off making that decision. Right?

The problem with making a decision early is that you don't always know what you don't know. By buying some extra time... by deferring an option until closer to its expiry... you create an opportunity to learn MORE information... information you probably didn't even know would come available.

You might even end up with some new options... and guess what... those new options have value too! And that is the real rub... it's not just the value of the of the options that you have now... it's also the value of the options that have not yet presented themselves. There are times when it makes sense to decide early... but make sure you know why. Fear of the unknown is not really a good reason to decide early.

If you are deciding early because you think you know everything... you might be closing off options you didn't even know you had.

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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

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Understanding Real Options

I had the distinct pleasure of spending time with Chris Matts and Olav Maassen last week at the Seattle APLN Leadership Summit. It was a good time all around.

We explored the impolite topics of religion and politics and even shared an idea or two about Agile Leadership. Talking with Chris and Olav was the first time I had anyone sit down and explain to me the concept of Real Options. I was fortunate that I got to hear it straight from the guys that are driving some of the thought leadership in this area.

There is no better way to solidify a concept in your brain than to write about it and teach it others. I am no expert on Real Options but would like to see if I can share with you what I learned. Hopefully we'll generate some conversation along the way.

The concept of Real Options is very straightforward. It is so straightforward that you can summarize it on the back of a business card:

Options have value
Options expire
Never commit early unless you know why

Like most things that appear simple, I think there is a little more to the story, a little more that needs to be explained.

Options Have Value

An option is a choice. It is a decision to select one strategy over another strategy. To buy one product over another product. To build one feature over another feature. To decide on one course of action over another course of action.

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.

Our options, the decisions we make, have value. The interesting thing here is that it is not just the options we know about that have value, the options we don't know about have value too. We are generally pretty good at determining the value of the known options, but what about the value of the unknown options? That's just it… 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

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. 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 just 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, just 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

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.

Thanks!

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