Thursday, April 05, 2012

Real Options

Shane Hastie interviews Chris Matts and Olav Maassen on Real Options, an agile technique to improve IT decision making.

Do read it all. A taste:

InfoQ: Please can you briefly explain Real Options. 

Olav: Options have value, options expire, never commit early unless you know why.

Options are a way of looking at decision making. Financial options work in very narrow areas, in the financial marketplace they entail paying a fee to defer making a choice about purchasing a share or financial instrument until a later date. Our thinking about Real Options was inspired by financial options, but they are much broader in application.

Real Options are more to do with the psychology of how people make decisions than with the choices available to them. 

InfoQ: Please explain. 

Chris: People hate uncertainty, so much so that they would rather be wrong than uncertain. In a “rational preference” the hierarchy of decision making would be:

  1. Have the right answer
  2. Be uncertain about the answer
  3. Have the wrong answer

The reality is we prefer to be wrong rather than be uncertain, so the hierarchy is:

  1. Have the right answer
  2. Have the wrong answer
  3. Be uncertain about the answer

We can tell this because when people are faced with uncertainty, they would rather make any decision, even if it is the wrong one.

Generally people would rather have a definite wrong answer than be unsure about an answer.

Real Options is about understanding when to make a decision, rather than how to make decisions. By adding the “when” to the decision making process we remove the uncertainty and enable people to make better decisions.

Like financial options have a fixed contractual expiry date, real options have a conditional expiry date.

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