Once More, With Feeling

Many thanks to the 28 individuals who chose to play the new Real Options Space game at Agile North mini conference last Saturday. Based on the retrospective feedback, we left folks with much food for thought. As usual, Pascal and I found that each time we play the game it makes us think more deeply about what Real Options really means.

What are Real Options?
Real Options is a decision-making process for managing uncertainty and risk. It's a simple and powerful approach that helps us make better informed decisions, as individuals and in groups, by understanding and responding to the psychological effects uncertainty has on our behaviour.

Real Options means:

1. You don't have to decide now (aka 'Decide at the last responsible moment')
2. But you know when to decide
3. Keep as many options open for as long as possible
4. Actively gather information until you have to make the decision
5. Only commit when you must or when you have a good reason to.

A Real Option:

• Has a value
• Has an expiry date or condition
• Costs: cost of buying the option + cost of exercising the option.

You exercise an option only when its value is worth more than its cost. That's where the similarities of the metaphor between Real Options and financial options end.

Isn't that just common sense?
Yes it is! The problem is that common sense doesn't make it common behaviour. Take a look around you. How does your team or manager make decisions under pressure? How do you make decision at times of intense stress?

Uncertainty makes people impatient and afraid. Under pressure, people tend to 1) make the right decision, then 2) prefer to make the wrong decision rather than 3) postpone the decision until the last responsible moment which leads to ill-informed decisions that create problems later on.

Real Options reminds us that waiting is an option, too. The trick is to spend the waiting time on gathering as much information as you possibly can to better understand your options and, where possible, create new ones.

Real Options is difficult because it's an information hungry process. It requires effort and that's one reason why many people don't do it even though they know it's the best way to make optimal decisions.

How much is an option worth?
The value of an option varies and depends on time as well as context. Its value is what it's worth to you at different points in time. The key is knowing the relative value of an option in comparison to the other options you currently hold.

Give me an example
The Agile North mini conference is a good example of a Real Option.

• Option value = conference for learning new stuff
• Expiry date = deadline by which you have to sign up for the conference
• Cost of buying the option = effort required to register (conference entry was free)
• Cost of exercising the option = effort for travelling to the conference and giving up a Saturday afternoon to go on a space adventure
  

Real Options is not nonsense
Real Options is an optimal decision making process. Even though it's common sense, it's surprisingly hard to do.

One participant said, 'The game reminded me about the importance of a lesson I learnt 10 years ago on an orienteering course but never really sunk in.' To find out what that lesson is, come play the Real Options Space game (version français) at XPDay France next week.

Real Options is very simple in theory, but difficult to put into practice - especially at work or when people are placed under pressure. How can you use Real Options to make better decisions?