Sunday, April 08, 2018

Do I really have to? On Options and Commitments

Aside from the whole sprint-commitment thing, there is another commitment-issue I tend to have.

People often misunderstand options for commitments

And it can be very liberating to get rid of that confusion.

“I can’t go to that lecture, I already have a ticket for the cinema.” Is the cinema ticket an option or a commitment?

“I can’t go to that conference I’ve already booked flights for those dates.” Are those plane tickets options or commitments?

In their excellent book “Commitment“ Chris Matts and Olav Maassen look into this question in depth, but for now let’s just look at one very important take away from pondering the above questions.

#1: If something is an option or an obligation (a commitment) depends on whether you're buying or selling. The tickets in both cases are options for the person who bought them but commitments for the sellers. The cinema is obliged to show the movie, but I as a buyer have merely bought an option. I can exercise it or i can choose to let it expire. I am not obliged to go to the cinema, I have only bought an option to go there.

#2: Options have a value (and a price) (Almost straight from the book) Different options have different prices. Depending on my perceived value of the option I might be willing to pay the price or not. The option to fly somewhere might be more expensive that option for the movie, but still the question is what I am willing to pay. I am not obliged to take the plane. Thinking about it in that manner means that I did not pay for the flight (if I did I probably would pay when I enter or leave the plane, like with a bus ticket) I paid for the option to take that plane.

To me this way of thinking is quite liberating. Just make sure you know on which side of an option you are. People tend to loose a lot of faith if they were sold options and the other side doesn’t keep their commitment.

till next time
  Michael Mahlberg

P.S.: You can find a draft version of my take on real options on this blog including pointers to the whole background in Chris Matts’ and Olav Maassens’ excellent book and some online resources.

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