There is a lot of talk about the last responsible moment. So what is the last responsible moment? And perhaps more importantly: how do you calculate the last responsible moment?

The last responsible moment is after which execution of an option is too late. The option no longer exists or you’re not able to execute it any more.

So how do you work out the last responsible moment for a real option? There is a 3-step process:

1. Work out the deadline
2. Identify options
3. Determine execution time for each option

These steps together give you the last responsible moments. Moments is plural as each option involved in the decision has a last responsible moment. And to be able to determine the better option among the choices we need to know all their last responsible moments.

Identifying the real deadline for your decision is harder than it may seem. While in the process of identifying options and gathering information at a certain point patterns arise. You need to find these patterns to identify the real constraint. Often it is possible to come up with completely new options never thought of before when trying to solve the newly found constraint.

After identifying many options work out the last responsible moment for each of these options. Perhaps you need some preparation in advance to be able to execute, also you need to factor in lead time and add some padding for unidentified disturbances.

Most importantly: don’t decide in advance, it will lead to premature optimisation. You need to know when options expire (when their last responsible moment has passed) to be able to make a deliberate decision not to execute an option.

Optimal Last Responsible Moment

We often get asked: is it possible to determine the optimal last responsible moment? No! Yes! Well maybe. The problem is determining the optimal moment is that it is only possible in retrospect. Only when we know what happens after that moment we can be certain it is the optimal moment. This provides us with no value at the time of decision making. Therefor trying to find the optimal moment is a waste of effort.

Look for the last responsible moments. If you can only identify one or two you haven’t looked hard enough.

This is the start of the real options blog by Chris Matts and Olav Maassen. This is where we will post anything we think relevant to the field of real options.

We’ll start with three comics Chris drew on the tube to explain several complicated aspects of real options.

Short intro to Real Options

Financial Options (This one is big)

Last Responsible Moments