A3. Choose Timing:

Why decide now if you can decide later?

What is the precise value of having a choice? While it can be a profoundly philosophical question, it can also be a very tangible one. This is a core concept in finance where models such as the Black Scholes formula stipulate a precise monetary value. In this model, unpredictability and time are two main drivers in determining the value of our optionality. This makes intuitive sense as the more volatile environment, the higher the value of waiting to decide.

How volatile is our relationship these days, and how much longer would we need an open option before deciding if we want to go down on one knee? Would our partner agree on this view, taking their time to make their mind up about us, or do they consider the wait as added uncertainty?

We often fail to recognize that other people abide by the same logic as us. If we wait until the same day to respond to the invitation to Friday’s dinner party, we’ve held great optionality while the host will be less relaxed, having to shop for groceries at the very last minute. Realizing this dynamic can help us interact with others. Not only can we increase our optionality, but when we are more firmly decided than others, we may give them the valuable gift of certainty.

If, by now, we’re considering using Black and Scholes to calculate the upside of delaying getting married, we may want to reconsider our decision-making criteria. But it may help us plan that honeymoon. We likely have an intuitive feel for the volatility of hotels and airfare pricing over time, where hotels would like to reduce the risk of having empty rooms, offering early bird rates. In contrast to us wanting to delay the decision, we’ll know our availability and weather forecast closer to the departure date. If we are certain months in advance, though, we will be rewarded in clear monetary terms.

While often not as transparently priced, this dynamic can be found in most transactions. Are we to invest in that high-risk startup? Given high uncertainty, the longer we can wait to decide given the same valuations, the better. This becomes apparent to anyone who followed a new company that may, every week, go from just about bankrupt to “the next big thing” and back again. Still, the company may value their risk over time even higher, unsure about paying its bills next month. If so, we could trade our optionality for, let say, a better valuation given that we transfer the payment right away.

Haggling at the market, cash in hand, is more valuable than a mindset of, “I’ll think about it and come back later.” Certainty, especially in uncertain situations, is highly valued, not only at the market. Trade it for a better deal or give it as a gift. In a world full of uncertainty, knowing what you want and standing by it becomes increasingly valuable.

So, when then is the right time to make a decision? Our options value will increase with time and volatility, but that’s just half of the story. If we wait too long to decide, the valuation of our investment may have doubled, or our partner got tired of our indecisiveness. To understand the optimal timing, one definition would be:

[Our options value] = [Our added benefit from more information over time] – [The counterparts perceived value of certainty over time]

Here we can regard the counterpart as the flight industry’s pricing algorithm, the startup needing investment, or even our internal emotional state. Intellectually we could argue for holding the decision for our next vacation. But even without considering other people or pricing, how well do we work in situations with many plans but no decisions? How do we keep a sense of direction in life if we are never decisive enough to show commitment to others and ourselves? The transparency of how we value things should be absolute for ourselves as well as for others.

In line with full transparency, do not aim to gain from information advantage. Instead, find common arbitrage from when both sides apply different values to the same information. We don’t sell our fried a car because we found technical problems that we keep quiet about but because they see higher relative value in the car than us at the time. This is how we truly get to know others’ preferences, form long-term relationships and maintain stable equilibriums. Everything that instead builds on the deception of others or ourselves naturally adds instability and risk of conflict the further we stray from the truth.

Gun to our head. When applicable, the practice of deciding on a hypothesis right now, illustrated by being forced to choose at gunpoint, often reveals the natural answer to even complex decisions. This scenario is often a useful tool to prompt intuition and force a decision down to minutes instead of months. And it works best when the problem is not a lack of information but a lack of decisiveness. If this feels too rushed, declare instead our current hypothesis that we are free to change given new data, but that can still serve as a clear guiding principle. It will clarify us and others on where we stand while reducing complexity in case of dependencies on our decision.

We’ve all been trying to decide where to go for dinner with a group where everyone is open to everything. Being open is good, but stating our preference while then being open to other suggestions is better. Making the perfect choice of all restaurants in the city is overwhelming, so we should give our friends the gift of decisiveness by showing our preference. By challenging ourselves to what we really would like, we communicate our preferences to others and ourselves alike.

SYNTHESIS:

• - Understand the right time for a decision by recognizing how we and our counterparts value certainty over time.
• - Do not seek individual gain from an advantage in information but joint arbitrage from having different preferences and trading, using each party’s comparative advantage.
• - Consider the “gun to our head” approach when new data is non-crucial for the decision. Declare our current hypothesis to show direction unless new data becomes apparent.