Real options, the value of waiting, and procrastination

“So tell me, what is so special about this Real Options?”

Each time when I hear people talking about real options, I would hear Brian Hardaker questioning me again in his Australian English.  That was about 8 years ago when we met to discuss my PhD proposal on ‘Discovering Real options in controlling foot-and-mouth diseases’. At that time, the Real Options approach promised to become the new paradigm of decision-making under uncertainty. Brian was intrigued by the ‘hype’, but clearly not convinced of the added-value of real options. In fact, he was quite skeptical about the whole Real Options thing. In his opinion, as I interpreted,  the real options approach was not much more than dynamic programming with the option of waiting included when it comes to dynamic decision-making.

After years of muddling through in the worlds of real options and epidemic diseases, I eventually came to the same conclusion. It’s tough to admit, but the professor was right, the real options approach was indeed not that novel, at least, not qualifying as a new paradigm. But so are many other ‘new’ theories and ‘new’ insights:  they merely offer new vantage points or new angles to look at the same old thing.  The success of real options at that time could probably be attributed to the fact that, while not many people were familiar with dynamic programming, many people did trade in options or knew about financial options. And most people intuitively value options more than obligations and tend to procrastinate if decisions involve high sunk costs and high uncertainty.

My close friends often sneer at me when I talk about the science of decision-making as part of my profession. They have good reasons: For someone who has spent more than 15 years hesitating whether or not to get a divorce, it’s hard to imagine that she knows how to make good decisions. 

Well,  I have had hard time with my marriage and have kept people waiting for the resolution. But in my defence I would argue that decision-making is seldom a now-or-never thing, and I have just been waiting for the right moment. Viewed from this perspective, I am probably a born ‘Real Option-ist’:  someone who recognizes the possibility of divorcing as an option, but not an obligation, to change my life for something potentially better than remaining in a marriage that sucks most of the time.  I have kept postponing the decision because I realize that, once I actually ’exercise’ this option, there would be irreversible costs, both financially and emotionally, which might be avoided if I postpone the decision.

Of course postponing the decision also has costs, and it can cost dearly. Even when all the mental energy that was consumed can be ignored, one should always question whether the benefits of waiting can offset the costs. When this is not the case, it is high time to realize that holding real options is no excuse for indulging in procrastination.