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<head><title>Analyzing Xp With Options Pricing</title></head><body><h1><img src="logo.gif"> Analyzing Xp With Options Pricing</h1>There are four particularly important kinds of options that occur in real
projects, and I think that XP supports the development of all of them.
<p><em>Option to abandon</em>: if you find that the overall business value of your
project has diminished, you can abandon it. XP provides and explicit
abandonment step. Abandonment value is increased by virtue of having
developed and used core skills whose value is retained under abandonment.
Many processes do not consider explicitly the idea of abandonment (except in
terms of "failure" and "disaster").
<p><em>Option to switch</em>: this is very explicit in XP, the option to switch course
that is created by the continuous re-evaluation of what you are doing and
where you are going, and by not assuming a priori that you will never change
direction.
<p><em>Option to defer investment</em>. This is the one I really am impressed with,
because here XP really goes against the grain of IT conventional wisdom.
Conventional wisdom says that you should always build in stuff early, even
if it's not clear yet that you'll need it later. XP acknowledges explicitly
that sometimes it's better to wait, because the projected value of making
that early investment may not materialize. XP explicitly recognizes the
value of your option to wait.
<p><em>Growth option</em>: investment to take advantage of a possible future
opportunity. Well, okay, this is a little less clear in the case of XP, but
the fact that XP encourages development of core capabilities that can be
employed if the market opportunity explodes helps.
<p>Now, here are the main factors that influence the value of any option:
<p><UL><li> the amount of investment required to obtain the option.
<li> the value of the "prize" - the investment that the option allows you to make.
<li> the uncertainty surrounding the value of the "prize"
<li> the amount of time between when you have the option and when you have to make that contingent decision
<p></UL>Far and away the biggest influence of all those factors is the third one:
the amount of uncertainty. This says that XP exhibits the most value in
uncertain environments, where "anything could happen" in the external
environment. In certain environments, where the future is stable and
well-understood, a traditional plodding development process is fine, because
you can predict exactly what you're gonna need and when.
<p>--JohnFavaro<a href="http://c2.com/cgi/wiki?edit=JohnFavaro">?</a>
(also thanks to <a href="http://c2.com/cgi/wiki?MaroanMaizar">MaroanMaizar</a>)
<hr>
The finance theorists call the use of options pricing for evaluating projects 'Real Options'. However it is a bit iffy to use analogies with options
on traded assets because they have peculiar properties. (Although it is quite
a good way of justifying ludicrous valuations of dotcom companies :) )
In particular with options on traded assets more uncertainty == more value and expected return on the underlying thing is irrelevant. In options on non-traded things this isn't necessarily the case. This is because with the traded asset you can (in theory) have a strategy to continuously buy and sell it and end up with something that behaves exactly like your option. You can't do this with an option on something which is not traded.
-- <a href="http://c2.com/cgi/wiki?ChrisCottee">ChrisCottee</a>
<hr>
<p><p>Could the option to grow be the same as the XpMayScale<a href="http://c2.com/cgi/wiki?edit=XpMayScale">?</a>? Or perhaps XP abandons the value of this option in favor of the value of the other three. <em>More the latter, I think</em>
<p><hr>
<p>"<strong>Option to abandon</strong>" doesn't seem quite right:
I happen to be reading the ProcessPatternsBook<a href="http://c2.com/cgi/wiki?edit=ProcessPatternsBook">?</a> by ScottAmbler<a href="http://c2.com/cgi/wiki?edit=ScottAmbler">?</a> this week, and he hammers home that in the "Justify Stage" (one of the first things one does when a project starts), one must determine if the project is feasible, <strong>and kill it if it's not.</strong>
I think that most methodologies do at least lip service to the planned "cancelability" of projects -- at the beginning, during the project approval process.
<p><em>(In practice, the "Justify" stage is used to perform heavily slanted sales presentations to the <a href="http://c2.com/cgi/wiki?GoldOwners">GoldOwners</a>. But that's another issue. ;-)</em>
<p>I think a big advantage to <a href="IncrementalDelivery.html">IncrementalDelivery</a> is that it gives the users the option to abandon the project at (nearly) any time -- and still preserve the value (development effort) that has been invested thus far.
That is, you have the "option to abandon, and declare the project a success."
<p><p>I think the "<strong>Growth option</strong>" with XP would be related to maintainability:
Because of <a href="DoTheSimplestThingThatCouldPossiblyWork.html">DoTheSimplestThingThatCouldPossiblyWork</a> and <a href="RefactorMercilessly.html">RefactorMercilessly</a>, the system is highly maintainable and can be changed easily.
With waterfall development, flexibility in ways that were designed into the system early on is easy, but changing the system in other ways is relatively hard.
<p>-- <a href="http://c2.com/cgi/wiki?JeffGrigg">JeffGrigg</a>
<p><hr>
<p>Found this reference:
<p>"Software design as an investment activity: A real options perspective," K.J. Sullivan, P. Chalasani, S. Jha, and V. Sazawal, in Real Options and Business Strategy: Applications to Decision Making, L. Trigeorgis, consulting editor, Risk Books, December 1999, pp. 215
<p>Anyone read the book?<hr><a href="http://c2.com/cgi/wiki?edit=AnalyzingXpWithOptionsPricing">EditText</a> of this page (last edited October 16, 2000)<br><a href="http://c2.com/cgi/wiki?FindPage&value=AnalyzingXpWithOptionsPricing">FindPage</a> by browsing or searching<p><font color=gray size=-1>This page mirrored in <a href="index.html">ExtremeProgrammingRoadmap</a> as of March 31, 2001</font></body>⌨️ 快捷键说明
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