Yesterday, in To tree is the answer, Herbert praised the elegance of trees when analyzing real options. Has this topic "real options" any relevance to your individual life?
I claim "yes, it has", and it has almost daily.
A real option always comes into play, when a party (here: you) has the choice to invest or not, or to invest to a certain extent. Do you have the choice?
Think of mobile phones. In the good old stone-age of telecommunication in Austria (up to the mid 1990's), there was an absolute monopoly in the telecommunication market. Service quality was poor, and prices were high. With the destruction of the monopoly, Austria became one of the most competitive markets (concerning mobile communication) in the whole world. Customers were offered free mobile phones with their contracts (running for 2 or 3 years), and the prices per minute in a national call dropped from around 50 cent to close to nothing.
When you are up to enter a new mobile phone plan, you have to decide:
- Do I want a flat rate with many free call minutes, text messages, data volume at a higher level or do I want to have a low basis fee and higher per-minute costs?
A classical real option.
To decide it, you should know your telecommunication habits (difficult enough, because you have to make a forecast for the next two years). I am also convinced that (following Kahneman's loss aversion principle) most persons do not feel comfortable when exceeding their call minutes quota and therefore tend to have too large volumes on their contracts.
Anyway. The costs of mobile communication are peanuts nowadays.
Is this (negligible costs) also true for individual traffic? When you live close to public transport, do you need two (ore more) cars per household? Is car-renting or car-sharing a real option alternative?