At the very beginning, I did a straightforward ROI type of analysis. The decision seemed very clear from that perspective. There was one line that took a little more work to get to, but was half as long and had twice as many windows operating. It should have moved twice as fast. Easy choice!
I hadn't considered the uncertainty in the model.
The people in line "d" were long a call option on all of the windows to the right. If any of the windows from "e" through "h" opened up, they could easily exercise that option by walking over and moving to the new line. I hadn't thought of that until it happened!
Once window "e" opened up, I sat there considering moving to line "e", thinking they might open up "f" or "g" or "h" and I didn't want to miss that opportunity, even though it meant moving to the back of the line. I decided I was pot-committed to "b" when the other option in the mix made itself known...
The crew of any plane that happened by was long a call on window "a" and "b"! Since I was in line "b", I was effectively the counterparty and short a call on those windows. When the crew turned up and took over the windows, they exercised their call and my line came to a stop.
This story is a pretty good representation of the value of using a real options decision framework for a couple of reasons. The most obvious reason is the importance of involving uncertainty in your decision. If nothing had changed, my first choice was unquestionably the best.
The second reason is the importance of having a dynamic decision framework that can adapt to new information. It's easy to make a straight-forward ROI type decision when you ignore the changing world. One line was served by two windows and was half as long! That's an idiot-proof decision! A few minutes later, the decision was more complex. I was at the end of a line that was roughly the same length as the others, but didn't have the advantage of more windows possibly opening up. A few minutes after that, I was at a stand-still. A robust, options-based decision framework that encapsulated the upcoming decisions would have helped.
From an executive decision making perspective, this sort of decision tool is almost never available. What can be available, however, is some intelligence about what the inflection points are. If I had any idea about the chances of another window opening up, or what the chances of a crew showing up, I could have produced some heuristics about comparative lengths of each line and made dynamic adjustments to my strategy when the real world changed in front of me.
I hadn't considered the uncertainty in the model.
The people in line "d" were long a call option on all of the windows to the right. If any of the windows from "e" through "h" opened up, they could easily exercise that option by walking over and moving to the new line. I hadn't thought of that until it happened!
Once window "e" opened up, I sat there considering moving to line "e", thinking they might open up "f" or "g" or "h" and I didn't want to miss that opportunity, even though it meant moving to the back of the line. I decided I was pot-committed to "b" when the other option in the mix made itself known...
The crew of any plane that happened by was long a call on window "a" and "b"! Since I was in line "b", I was effectively the counterparty and short a call on those windows. When the crew turned up and took over the windows, they exercised their call and my line came to a stop.
This story is a pretty good representation of the value of using a real options decision framework for a couple of reasons. The most obvious reason is the importance of involving uncertainty in your decision. If nothing had changed, my first choice was unquestionably the best.
The second reason is the importance of having a dynamic decision framework that can adapt to new information. It's easy to make a straight-forward ROI type decision when you ignore the changing world. One line was served by two windows and was half as long! That's an idiot-proof decision! A few minutes later, the decision was more complex. I was at the end of a line that was roughly the same length as the others, but didn't have the advantage of more windows possibly opening up. A few minutes after that, I was at a stand-still. A robust, options-based decision framework that encapsulated the upcoming decisions would have helped.
From an executive decision making perspective, this sort of decision tool is almost never available. What can be available, however, is some intelligence about what the inflection points are. If I had any idea about the chances of another window opening up, or what the chances of a crew showing up, I could have produced some heuristics about comparative lengths of each line and made dynamic adjustments to my strategy when the real world changed in front of me.
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