Tuesday, 17 February 2009
Last Friday, we celebrated the forthcoming weekend with a session on Real Options, a simple, yet powerful decision making tool. What better time to learn how to deal with uncertainty than in highly volatile times such as these?
What’s your story?
We kickoff the session with an unusual ice breaker called Six Words. Each participant is given a small white card on which they write six words that sum up their lives or who they are. Each group of six words tells a short story, an idea originating from the writer Hemingway.
Participants then circulate to exchange their story with as many people as possible within 3 minutes. Judging from the outbreaks of glee mingled with quiet surprise and lots of questioning, everyone seems to be having fun. This is important because it correlates with my current team’s top team value of ‘Fun’.
Knowing when to decide what
Next we learn about the simple, yet powerful tool of Real Options. You can download the session handout here.
Real Options means you don’t have to decide now. Instead, you need to know WHEN you have to decide. You want to keep as many options open for as long as possible and actively gather information unti the moment you have to decide. Last, but not least, you commit only when you must or when you have good reason to.
A Real Option:
- Has a value – if not, why would we consider it?
- Has an expiry condition – a deadline or condition by which we have to choose
- Has a cost: Buying cost + Exercising cost – the Buying cost gives us the right (not the obligation to implement a decision in the future for a known cost); the Exercising cost is the agreed price to implement the decision
Real Options help us deal with two of the most daunting features of any project: Uncertainty and Risk. Real Options creates opportunities out of Uncertainty by encouraging us to postpone our decision making so that we have more time to gather information. This, in turn, helps us make better informed decisions. Real Options mitigates Risk by explicitly encouraging us to wait and see what happens before we decide.
The Optimal Decision Process
The Optimal Decision Process helps us structure our thinking in 7 steps (especially when we’re under pressure):
- Identify your options
- Calculate the first decision point: Decision Point = Deadline – Implementation Time
- Decide which option to take under which circumstances
- Seek out information and more Real Options
- Reduce Implementation Time to push back Decision Point
- Wait… wait… Until the first decision point
- Make the decision with confidence
Then, in groups of 4, We practice by identifying Real Options in everyday life, followed by working through one example in detail and mapping it to the Optimal Decision Process.
‘Agile makes my life more simple’
In response to the participants’ feedback, we’ll be meeting up later on this week to consider ways in which we can apply Real Options Thinking on our projects and to ourselves to improve our effectiveness as individuals. One thing’s for certain, it’s going to be F-U-N.