As intelligent humans with mental faculties honed by years of training and experience, we subconsciously know the good from the bad. We usually make good decisions in line with our long term goals. But there are times when we regret our decisions – for either making or NOT making them. It can be related to an investment or a property or a job switch or so many other things in life. We learn from our mistakes and get better. In the process, we update our mental models to assess situations better and make smarter decisions in the future.
In this blog post, I will share my understanding of two tools from Mary & Tom Poppendieck’s “Lean Software Development: An Agile Toolkit”. They are “Options Thinking” and “The Last Responsible Moment”. While the book is focused on software development, these two tools form a potent combination that can help us analyze situations objectively and make decisions that are aligned to any goals in our life.
Lets start with some definitions:
- Option (in financial domain) – A contract that offers the buyer the right, but not the obligation, to buy or sell the underlying asset at an agreed-upon price during a certain period of time or on a specific date (https://www.investopedia.com)
- Last Responsible Moment – The instant in which the cost of the delay of a decision surpasses the benefit of delay; or the moment when failing to take a decision eliminates an important alternative (https://www.leanconstruction.org)
While option has a similar (and simpler) English definition, I chose to use the definition from my professional domain, as it highlights the right vs obligation connotation. And we buy a financial option by paying a premium.
There are several situations that highlight options thinking:
- Book non-refundable airline tickets at a lower price OR book relatively expensive ones that provide an option to cancel later
- Reserve hotel rooms at lower rates by paying the entire non-refundable amount upfront OR reserve at higher rates by just providing a valid credit card number with an option to cancel till a cut-off period without incurring any expense
- An Indian software company that expects US Dollar receivables from clients in the future can encash the proceeds at prevailing exchange rates when it receives them OR hedge against possible future rupee appreciation by buying FX options after paying a premium
In all these cases, the choices in italics are more economical BUT we are committed to them. The price difference between them and the relatively expensive alternatives is the cost of delaying the decision. For example – if we need to cancel our travel, the non-refundable ticket will result in a much bigger loss than the one with cancel option. And one such need to cancel might wipe out all the savings we accumulated over several years by diligently selecting the choice without options!
Does it mean the more expensive alternatives completely protect us from a loss given we have paid a premium? NO. Imagine our travel plan changed but we forgot to cancel the hotel reservation before the cut-off time, then we will be charged for one night. Or Indian Rupee appreciated by 15% against the US Dollar and the FX Option is in the money but the company forgot to exercise it before the expiry date, then the option becomes worthless. These crucial moments when an alternative is eliminated will be the Last Responsible Moment.
So, this is what I have learnt about the process of making decisions that we will not regret later:
- Set our vision and goals – Different individuals have different priorities and what is important for one need not be the same for another. So, we need to set our own vision based on what we want to achieve in life and define our goals appropriately. This will create clear guiding principles for us and help avoid distractions caused by ubiquitous marketers and ill-intentioned well-wishers.
- Understand the situation and list out the alternatives – It can take anywhere between a few seconds to several days to identify all possible alternatives that are aligned to our vision. The time it takes depends on the time we have to decide and the amount of learning we need to go through to fully understand the situation. We should avoid going with our gut feel as I have already explained that our gut feel need not necessarily deliver the best results.
- Decide as late as possible – This is where options thinking comes into play. Some alternatives might appear more expensive in the beginning. But as we progress, we might realize that the cheaper one cannot deliver the required results but will hurt our reputation or even cost our job. It does not mean the costlier alternatives are always the best! It all depends on the situation and we need to decide after analysis if it will be worthwhile to keep our options open by paying a premium.
- Make the decision – Keeping our options open should not result in analysis paralysis. We should always be cognizant of the last responsible moment and make our decision before we lose the potentially best alternative.
Finally, I see some people NOT wanting to deal with this complexity at all and just go with the flow. This is essentially favoring status quo and might appear to work some times. Remember, the leaders who create history are the ones who take risks and challenge the status quo instead of just going with the flow. If we expect time to automatically provide a solution, we will not be a leader and will likely be letting some one else decide for us!
Net-net, if we want to be a futuristic leader, we cannot just wait for time to provide a magical solution. We need to actively analyze situations to come up with alternatives in line with our vision, keep our options open and decide at the right time!