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Real Options

by Kent McDonald

I'm pleased to announce that this year (finally) saw the release of Beyond Requirements, a book I've been working on for three years. I thought I'd share another excerpt from the book. This one focuses on decision making, especially when to make decisions, and provides a good tool that can be helpful when managing risks.

Following is an excerpt from Beyond Requirements: Analysis with an Agile Mindset from Addison-Wesley, ISBN 9780321834553, publishing in September 2015. Available wherever fine technical books are sold (InformIT or Amazon.com to name a couple of places).

People abhor uncertainty. When given a choice of whether to be wrong or to be uncertain, many people would rather run the risk of being wrong than continue in a state of uncertainty. Unfortunately, that tendency leads to uninformed decisions, without any good reason other than people were uncomfortable not knowing.

Chris Matts, Olav Maassen, and Chris Geary introduce the idea of Real Options in the graphic business novel Commitment. The idea can be summed up like this:

  • Options have value.
  • Options expire.
  • Never commit early, unless you know why.

There are two subtle yet key points that make the idea of Real Options especially useful in everyday life. First, it's important not to confuse options with commitments. Options are things you have the right but not the obligation to do. Commitments are things you have to do. Many things that people think are commitments -- such as tickets for airplanes, concerts, or sporting events -- are actually options. When you purchase an airplane ticket, you are buying the option to get on the flight, but you don't have to. Sure, you will be out the price of the ticket, but you are not obligated to take the flight. The airline, on the other hand, has made a commitment to get you to your destination (although those of you who travel frequently may feel like that does not always happen). Understanding this key difference between options and commitments helps you keep a clearer head about many decisions, because you will no longer feel trapped into having to make a particular decision.

Second, the idea of Real Options can help you decide when you really need to make your decisions. When you are facing a decision, take a few minutes to figure out your options, and then identify when those options will no longer be available -- when they expire. You can then use the time up to when the first option expires to gather more information that will help you make a decision. Even then you may not need to make a final decision. You really have to decide only if that option is the one you want to go with or if you would rather use a different option.

Let's look at an example from the Mercury space program. In February 1962, John Glenn was attempting to become the first American to orbit the Earth. The flight was planned for three orbits. At the end of the first orbit, Mission Control was just about to patch President John F. Kennedy through to Glenn when they received a "Segment 51" warning and Glenn began having altitude control problems. Mission Control told the president that they were a little busy at the moment and would have to call him back. The team then turned to figuring out what the error meant.

Segment 51 indicated deployment of the landing bag -- a rubber bag inflated after reentry to keep the capsule afloat in the ocean. The landing bag was situated behind the heat shield that protected the Mercury capsule from the intense heat of reentry. If the landing bag had truly deployed, that also meant that the heat shield had been pried loose from the capsule, which was not a good thing for John Glenn. Based on the data they had, the Mercury capsule could burn up during reentry.

Mission Control immediately began reviewing options. Theoretically, instead of jettisoning the retropack used to slow the capsule for reentry, they could leave it in place to save the heat shield. But leaving the retropack in place to burn up might also damage the heat shield. And some team members thought the Segment 51 alert could be a false alarm caused by an electrical failure, which could mean that leaving the retropack in place was an unnecessary risk to Glenn and the capsule.

With two orbits left, Mission Control began a series of simultaneous activities. Some controllers tried to determine whether the indicator was an electrical issue or if the heat shield had actually dislodged. Others tried to figure out what would happen if the retropack stayed attached to the capsule, and still others figured out how the reentry procedures needed to change if they decided to leave the retropack on. Chris Kraft, the flight director for the mission, stalled deciding whether to leave the retropack on until the last possible moment so he could have as much information as possible.

Walter Williams, the operations director and Kraft's boss, finally made the decision to leave the retropack on, but only when the retropack rockets had fired, the team was sure the rockets were not at risk to explode during reentry, and there was still enough time to alter the reentry procedure to accommodate the change. Of course, Glenn returned safely.

Later analysis confirmed that the Segment 51 reading was invalid.

Kraft knew that his options started running out when Friendship 7 was over Hawaii during its last orbit. He therefore postponed any decision until that point so the Mission Control staff could gather information and try to determine what was really going on.

You can use the idea of Real Options in your everyday life, including your software projects. When you are faced with a decision, find out what your options are, find out when they will no longer be options, and use the intervening time to uncover more information so that you can make an informed decision. Waiting to decide and putting the time to good use will improve your chances of making the right decision and help you to be a little more comfortable with uncertainty.




Related Post
Decisions, Decisions
We were still three months out from the targeted implementation point, but there was a burning desire to make a decision NOW! Did we really need to make the decision right then?




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