3 reasons every product manager should use options thinking to reduce risk

Photo by Bern Fresen on Unsplash

Managing a product is constantly choosing between options. Each decision brings us closer to success or failure. Therefore, it’s important to know how to make optimal choices. Options thinking has connections to the Options financial instrument but it’s also a way of thinking, generalising beyond finance and into product management.

Reason 1: Traders exploit Options to make profits, PMs can exploit them to make competitive products

There are roughly three types of options. Financial options, embedded options and real options. Real options are the ones that apply to product management.

Financial options: In the 17th century, traders in Amsterdam paid farmers for the option to buy tulips from them in the future and at a set price. The traders were happy because for a fee, they could have the flexibility to buy/not buy when the time came. The farmers were happy because they had the certainty of being paid the initial amount. The cost to the traders was the initial fee that could turn out to be fruitless, while the cost to the farmers was potentially not making a sale or selling for a lower than market price.

Options always have costs and value associated with them.

In the end, this turned out into the first burst of a speculative bubble, but options trading continued.

The Black Scholes formula (1973) was developed to put a dollar value on options so that people entering into a deal, like the Amsterdam traders and farmers, could estimate the value of options and reduce risk with maths, not speculation.

Embedded options are the options that occur hidden in contracts but were not intended to be options.

For example, an IT service provider may propose a phased contract with 2 phases priced separately. The buyer can buy phase 1 but isn’t committing to buying phase 2. The buyer can buy or change the supplier for phase 2. As opposed to financial options, the buyer does not have to pay a premium for the option and there is no expiry date.

Real options the ones we have in product management and in our day to day lives, and exist outside of legal frameworks. There are three useful points to know about them.

  • Real options have value beyond the benefit you receive from making use of them (intrinsic value). The fact that you can put off making a commitment is valuable in itself. However, the higher the uncertainty, the higher the value.
  • Real options expire, based on time passing or another event making choosing certain options no longer possible. You should keep track of the expiry conditions or events that could make an option unavailable.
  • You should not commit unless you have a good reason to. Once you commit you give up your options for the benefit of realising one of them. It’s not about committing as late as possible — that also carries risks and costs. It’s about giving yourself as much time as possible to gather all the necessary information needed to de-risk your final choice.

A common mistake people make is committing too early without carefully considering their options, maybe not feeling a particular need to look at different options.

This is both suboptimal for them and for others around them. However, as product development happens within a team, not a vacuum, it’s important that good decisions are made by everyone so that the whole team performs well.

Game Theory

Game Theory has shown how humans are prone to make suboptimal decisions. We can take this knowledge and apply it to our product teams to stimulate team members to collaborate and evaluate options in a logical, methodical way.

We can learn from Thomas Schelling’s use of Game Theory to create a strategy to stimulate collaboration — even if it was used in an extreme, wartime situation.

Schelling termed his approach Strategy of Conflict.

Schelling forbid the adversary to communicate with decision-makers, making them see the beginnings of failure. This was used as a ‘nudge’ towards collaboration. The Prisoner’s Dilemma scenario illustrates that if one person fails (does not cooperate), others suffer too. This way he was able to induce the feeling of failure and encourage collaboration before actual failure and damage happened.

Since we product managers are responsible for the success of our product it’s arguably our responsibility to foster cooperation.

As a product manager, should you allow your team to feel like they’re failing in order to inspire stronger collaboration? Yes. If you inject or allow uncertainty in the system, people feel as if the system has failed and will start to collaborate. Allow the team to have constructive debates. Then, focus the discussion towards a resolution.

However, for teams to have debates they must feel psychologically safe.

Cultivate psychological safety to allow for ‘storming’ to occur at any point that’s needed. As the authors of Commitment wrote, “the opposite of a good relationship is not a bad one, it’s no relationship at all”. The way that I’ve encouraged psychological safety in the past was by pairing up with a colleague and having open debates together in front of the team. The idea was to reduce the perceived risk of our teammates raising concerns and giving constructive feedback by seeing how it would be received — with curiosity, with thanks and just as any comment.

We made constructive feedback as risk-free as positive feedback.

Innovation, creativity and good technology need this culture of psychological safety. Creativity thrives in stress-free environments.

We’ve seen the different types of options and how we can use Game Theory to get people to the point of wanting to evaluate possibilities. Now, here’s a framework for evaluating options and choosing the best one.

Reason 2: There’s a method to choosing the best options

Being methodical about choosing between options means, first and foremost, not committing too early. If you commit, you no longer have options to choose from. The reason that people do commit early is that certainty is comforting, uncertainty is the opposite and can even make people fearful.

Sam Harris and Leo Babauta spoke about this in a podcast. It’s something very natural but it can be detrimental to people achieving the results that they want.

However, if people are conscious of it, they can avoid early commitment for their benefit. Understanding that you are making a decision because of the discomfort of uncertainty is the first win.

The four parts to choosing between options

  • Understand that in any situation you have options — whether that’s your approach to communicating with stakeholders, the financing model you use, your approach to running an experiment. Sometimes you may have felt that you only have only one option, but that is rarely true.
  • You need to gather as much information as possible before you turn an option into a commitment. This means being conscious of the information you’re lacking and getting it.
  • Each option has corresponding outcomes and risks. Risks need to be mitigated. Once risks are mitigated, by creating a plan for that scenario, certain options that may have seemed too risky may now seem viable.
  • To gather the information you need time. An option has a higher value when there is more uncertainty. That’s why aeroplane tickets are cheaper if you book in advance. Stock traders make profits, or losses, from exploiting uncertainty. However, you should put off committing as long as you’re still collecting critical information. As it gets closer to the time your options will expire, other factors become more certain and the value decreases. Therefore, you need to weigh up the cost of delay and commitment. You should not commit unless you know your reasons for committing.

Scenario planning is a tool that can structure the four parts above. For each option or scenario, identify the outcomes and risks, the lacking information that could de-risk some scenarios and the time you have left to gather the needed information. Then, when you balance the information you have and the expiry of your options, make a decision.

I use it pretty much every day, if not several times a day. It reduces the energy I need to think of the best path forward. And who wouldn’t use some extra brainpower?

Options thinking in Product

Here are some examples of when I used options thinking

Opportunity prioritisation

Following interviews with users, my product team had a list of user needs to prioritise. While options thinking was not used alone to prioritise the next most valuable need to solve for and inform product strategy — Teresa Torres’s opportunity prioritisation thinking and tree framework is a powerful compliment — it was useful in evaluating the risks and coming up with mitigations of each option. It was also instrumental in informing what information should be gathered during experimentation before we fully committed to an option.

Experimentation in product management is an effective way to fill in knowledge gaps and mitigate the risk of solving for the wrong pain point at that time.

Stakeholder communication

With a colleague, we worked through the best strategy for a particularly high stake stakeholder communication. We considered the different options for the timing of the communication, the level of technical depth and our approach to asking for a certain action from them. It was effective in improving our teamwork, gave transparency into my reasoning process and reduced the risk of miscommunications internally within the team and with stakeholders. It’s also a pleasure to work this way as you bring people into your thought process, get their valuable input and increase teammate investment in solving the problem.

Understanding stakeholder pushback

What worked here was thinking about how the stakeholders are evaluating their options and the risks they were seeing in the option we were proposing. Once we identified those risks and proposed mitigations, there was less pushback and the stakeholder felt more understood. We actually strengthened the relationship by having gone through this situation.

So now we understand that we should be conscious of the fact that we have options and how to systematically go through the risks and mitigations, we may also think that the more options the better. Not quite.

As with many things, it’s about balance.

Reason 3: Options thinking helps to manage options when there are too many of them

Decision paralysis is where you are overwhelmed with options and find it difficult to make a decision. It’s not that individuals are seeing more options and find it difficult to make a decision, it’s that in this modern world, we’re served up an abundance of options without necessarily wanting or needing them. Bubble Tea shops — I’m looking at you.

And there is a cost to having too many options.

In his TED talk, Barry Schwartz spoke of his recent woes of buying a pair of jeans. Instead of expecting to find one pair of jeans in his size in the shop, instead, he found an overwhelming choice of fits, styles and colours. Ironically for Schwartz, and if you were in his place, after choosing your perfect pair of jeans, there is a high probability that you will regret your choice, be dissatisfied and you’ll only have yourself to blame. What if you had chosen differently? “What if’s” can be counterproductive. On the other hand, if there are fewer options, you’re not the first person to blame and are more satisfied.

So, how do we navigate the danger of creating too many options?

An English psychoanalyst, Donald Winnicott, came up with the notion of the “good enough” mother. While he worked in the field of paediatrics, it makes sense for options thinking too. As we already know, too little or too much of anything is not good. The best is to play somewhere in the middle, balanced.

Tips to optimise options thinking

  • While it’s good to get as much information as possible before committing to an option. Don’t go to the extremes. Get a “good enough” amount.
  • Not everything optional should be treated as an option. Your friend’s wedding is not an option. You’re pretty much committed as soon as you get the invite — there are exceptions, of course.
  • Hope for the best, expect the worst. In other words, have low expectations. You’ll be seldom disappointed.
  • Commit, know why you committed, and move on. Remember, “good enough” is good enough.

Thanks to Paul Shepheard for the introduction to options thinking

Thanks to Mom, Mark, Hervé, Finn and Misha for proofreading.

References

Babauta, L., & Harris, S. (2020). The Wisdom of Uncertainty. Retrieved from https://www.samharris.org/podcasts/waking-up-conversations/waking-up-course-the-wisdom-of-uncertainty

Khan, S. (n.d.). Introduction to the Black-Scholes formula. Retrieved from https://www.khanacademy.org/economics-finance-domain/core-finance/derivative-securities/black-scholes/v/introduction-to-the-black-scholes-formula

Maassen, O., Matts, C., & Geary, C. (2016). Commitment. Novel about Managing Project Risk.

Plessow, F., Fischer, R., Kirschbaum, C., & Goschke, T. (2011). Inflexibly focused under stress: acute psychosocial stress increases shielding of action goals at the expense of reduced cognitive flexibility with increasing time lag to the stressor. Journal of Cognitive Neuroscience, 23(11), 3218–3227.

Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving decisions about health, wealth, and happiness. Yale University Press.

Torres, T. (2019). Prioritize Opportunities, Not Solutions. Retrieved from https://www.producttalk.org/2019/02/prioritize-opportunities/

Tuckman, B. (1965). Forming, Storming, Norming & Performing Team Development Model. America: Situational Leadership.

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AI Product Manager | Combing academic theory and product experience to create useful PM tools | Ultra-marathon runner

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Ilona Melnychuk

Ilona Melnychuk

AI Product Manager | Combing academic theory and product experience to create useful PM tools | Ultra-marathon runner

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