Perhaps at some point in your life you have taken each of the actions a – e that follow. In doing so, you exhibited “options thinking.” For each, explain how the option value arises. Additional questions you might consider: What constitutes the option cost, the exercise window, the trigger strategy? How could you estimate the value it gives you?
a. Double-booking: You make a partially refundable airplane reservation and a refundable train reservation for the same trip because you are concerned about an impending major storm that would ground airplanes.
b. Lease versus buy: When moving to a new place, you rent an abode on a month-to-month basis rather than buying a house before moving.
c. Contingency: You are going to spend three months in Southeast Asia, working and traveling. You plan to visit a number of countries, in some parts of which malaria is prevalent. You may decide to go to these areas when you are in the country. You obtain a prescription for malaria pills from your physician and plan to fill the prescription and take the pills with you, even though you don’t know if you will use them.
d. Capacity planning: There is a big concert coming up and you are online to buy tickets. You must decide in real time how many to buy because they will be sold out in a few moments. You believe your partner would like to go and possibly a couple of friends and may be a couple of family members. You think that maybe you should buy four tickets and worry about what to do with them later.
e. Sequencing: You have two tasks to do. One is a group project with a classmate that can’t be done until that classmate provides some information. The other one is to edit video for the student newspaper’s Web site, a project that requires three video components that will come by e-mail. Characteristically, your classmate will arrive late for any scheduled meeting and may not have pre-pared all that he promised. And the video components may not arrive by the deadline. The group project and video project will each take two hours. You decide to schedule in the same window of time (1) a four-hour project meeting with your classmate and (2) a four-hour reservation for the video equipment you will need for your editing. You’ll decide later the sequence in which you will do the two projects.