Real options

September 9, 2021
Every day we're faced with the option, but not the obligation, to do something. This is one of the concepts behind the concept of "deferring commitment" in Lean software development.

You’ve probably heard of stock options. Many companies offer them as a form of compensation for people who stay with the company long enough. It’s basically an option, but not an obligation, to buy some company stock, usually at a preferential price. If you exercise the option (and the stock price hasn’t dropped too low), you can buy the stocks at such a preferential price, then sell them at the higher market price for a profit.

Of course there are other ways to deal with stock options, usually reserved for wealthy investors and institutions.

But every day, we’re all faced with another kind of option: “Real Options”. Wikipedia talks about real options again in the finanical sense, but we have “real options” in many other areas of life. We often talk about them simply as “options”. Should I eat chicken or beef?

Put simply, a real option is the option, but not obligation, to do something. You have the option to read this message or not. When you’re at a family gathering, and there’s one last piece of pie, you have the option to take that piece of pie, or leave it for someone else. If don’t want it yet, but you might want it later, you can put it on your plate to reserve the option (before someone else takes it).

Some options are free. Some have cost. Some have a potential delayed cost. In the pie example, there is a potential cost of not exercising your option to eat the pie: You may rob someone else of the pleasure of the pie. Or if your cousin notices that you haven’t eaten it, you may even receive a scolding.

So what?

We’re faced with these options all the time, in every line of work. It’s one of the ideas behind the concept of deferring commitment, which I’ll get into in greater detail later.

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