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Option Value - Explanation and examples

What's the cost of 'keeping all your doors open'?

 

What is Option Value?

How often do you get the train in your city? Have you ever used a train to travel to other parts of the country? Even if you never have, how much would you be willing to pay to preserve the option of taking the train in the future?

You may not have an exact figure in mind, but don’t worry - chances are that the policy-makers in your city have one, and they’ve already used it to justify the government’s continued spending on maintaining resources such as the railway. (Phew! We can keep the trains for now.)

Our willingness to pay for maintaining an option is called “option value”. It’s most commonly used in the creation of public policy surrounding the investment in public transportation facilities and environmental resources (such as public parks).

Option value captures the idea that individuals may still feel that they get a benefit from having access to publicly-provided services even if they’re not sure whether they’ll ever use them. We use option value to calculate the value of resources such as public parks, wildlife refuges, conservation areas such as forests and beaches as well as access to public transport services.

Option value and how it’s used by governments assumes that, for the most part, people are happy to pay to ensure the existence and maintenance of things, even if they may never use them themselves. People who work in biological conservation and biodiversity may also use the concept of option value to talk about the importance of preserving the environment because of the options the environment could provide in the future, such as un-discovered crops and medicines.

Very simply put, option value is the value of retaining options for the future.

Applications of option value

So how can we apply the concept of option value to our own lives? As we said above, the option value associated with a possible choice is the value of having this choice available.

In your career, if you’re very unsure about what you want to do, you might want to preserve option value by not making lots of hard to reverse decisions. For example, if you think you might want to have a career in science, you might choose not to drop out of math in high school (even though you don’t really enjoy it) just to preserve the option value of doing a college degree in science. Or perhaps you meet an acquaintance for coffee once a month, to keep the option value of a possible friendship alive. This is normally what we mean when we say we want to ‘not close any doors’, and we can understand it with option value.

Also check out:

1. Option value, Wikipedia

2. Why and how to keep your options open (in your career), 80,000 Hours

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