Thursday, July 30, 2009

Realistic About Risk: Software Development with Real Options

At QCON London 2008, Olav Maassen and Chris Matts gave a talk about Real Options. They started out with a quick exercise where the audience was divided up into teams and each team had to write down who they thought would finish task A 1st and who would finish task B 1st. then they gave detailed instructions of each task and asked the teams to complete them. At the end, none of the teams picked the correct winner, where as both Olav and Chris picked correctly. The point of the exercise was that Olav and Chris made their decisions later where as the teams made their decision early even before knowing what the tasks were.

They then compared the risk profile of an agile project (many short increments) vs. the risk profile of waterfall project (one long increment). People who are risk averse prefer the waterfall model even though the agile risk profile appears safer.

Next they explain real options which is an approach that allow optimal decisions with the current context. It has two aspects: Math and Psychology. Using math to price real options is hard, but the results of the math tell us that:

1. Options have value

2. Options expire

3. Never commit early unless you know why

When making a decision, you can be right, wrong, or uncertain. People hate uncertainty so much that they will rather be wrong than uncertain. From a psychological aspect, rather than saying don’t make the decision now, say let’s make the decision under these conditions and circumstances (postponed till a future date) “let’s do it when…”

They wrap up by showing how real options apply in IT. No big upfront design and defer decisions too last responsible moment. Pair programming gives you options by sharing knowledge and making you less dependent on one person. Also, by assign juniors 1st to projects this leaves seniors (valuable skills) to coach and mentor with an option to work on emergency or high priority projects that come up later. When using an MS project plan, it gives us the zero probability date. Before that date there is no chance of delivering early. On that date you have zero percent probability of delivering and then the distribution builds from there. A study shows that to get 90% probability you need to multiply the given estimates by 4.

This presentation is available on InfoQ at