The document discusses real options theory and how it can be applied in decision making. Real options theory treats investment opportunities as options on real assets rather than commitments, allowing decisions to be deferred until more information is available. This provides flexibility compared to traditional upfront decision making. The document advocates treating each problem and potential solution as having an option value and expiration date, and delaying commitment as long as possible to allow for new options to emerge. Real options theory provides a framework for making effective decisions under uncertainty.

1. Real Options
@ Work…
Tathagat Varma
VP, Strategic Process Innovations and HR
Innovation Labs

2. “stories”
per story!
14

3. “…people who were
right a lot of the time
were people who often
changed their minds.”
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5. Moral of the story?
Genius. Idea. Smart. Plan A, Luck. Vision
+ Common sense + Hard work + Baby
steps + Continuos feedback + Constant
steering + Plan B + Plan C +…
fail.fail.pass.fail.fail.fail.pass.fail…
SUCCESS!!!
but, how???

6. http://steveblank.files.wordpress.com/2010/11/two-assumptions.jpg

7. Problems?
✴Slow
✴Rigid
$$$……..??….$…???
✴Risky
✴Costly

8. So, why do we make such commitments?
Do we have
options?

9. Confers ‘rights’, but not an
obligation
Options represent choice

10. Commitment
or
Option?

21. Traditional decision-making
Assumes and expects all knowledge and
smartness upfront
Upfront decisions => Comfort, but no
options :(
Single decision-point => Stuck with it!
Prefer being wrong (“Bad Decision”) than
being uncertain (“No Decision”) !

22. Best travel choices in London?

23. Theory
The notion of real options was developed from Myers’ (1977)
seminal idea that one can view firms’ discretionary investment
opportunities as a call option on real assets, in much the same
way as a financial call option provides decision rights on financial
assets.
By way of analogy, a real option has as its underlying asset the
gross project value of expected operating cash flows; its exercise
price is the investment required to obtain this underlying asset;
and the time to maturity is the period of time during which the
decision maker can defer the investment before the investment
opportunity expires.
Formally stated, real options are investments in real assets, as
opposed to financial assets, which confer the firm the right, but
not the obligation, to undertake certain actions in the future.
REAL OPTIONS THEORY - Jefrey Reuer & Tony Wong

24. What is a Real Option?
An alternative or a choice
‘Real’ because it pertains to real
assets
Defer commitments till the last
responsible moment
Not procrastination!!!

25. Real Options Meme
Options have
Value
Options
Expire
Never commit early unless
you know why
http://commitment-thebook.com/pages/about-us

26. Agile, Lean and Real Options
Agile = Change
Lean = Efficiency
Real Options = Effectiveness

27. Using Real Options
For each problem, look at all the options
Each option has some conditions, cost and expiry
Put all options on a timeline
Identify how long you can hold off a decision
Until that time, keep looking for new options
Decisions are made when options expire
Once you need to act…act quickly!

28. Conclusions
Real options are everywhere!
Treat is like a decision-making aid
Remember the Real Options
meme…

29. References
Commitment - A Novel About Managing Project Risk, http://commitment-
thebook.com/
http://www.infoq.com/articles/real-options-enhance-agility
Strategy as a Portfolio of Real Options - Timothy A. Luehrman, http://hbr.org/
1998/09/strategy-as-a-portfolio-of-real-options/ar/1
Making Real Options Really Work - Alexander B. van Putten and Ian C. MacMillan,
http://hbr.org/2004/12/making-real-options-really-work/ar/1
A Real-World Way to Manage Real Options - Tom Copeland and Peter Tufano, http://
hbr.org/2004/03/a-real-world-way-to-manage-real-options/ar/1
http://vimeo.com/30604063
https://vimeo.com/75978656
http://theitriskmanager.wordpress.com/
https://vimeo.com/30605539