This document discusses economic frameworks for product management. It covers topics like:
- Understanding the cost of delay and value of information when making product decisions
- Applying decision theory and using tools like decision trees, risk matrices, and expected value calculations
- Quantifying the measurement and value of perfect versus partial information
- Considering opportunity cost and the idea that "time is money" when evaluating costs of delay
- Using frameworks like technology adoption lifecycles, horizons of growth, and optionality in decision-making
2. grasp the principles of cost of delay
understand the principles of decision theory
calculate the value of information
make product decisions in an economic framework
know how to apply optionality
learning outcomes
3. “you may ignore economics, but economics
won’t ignore you”
— Don Reinertsen
“The measure of execution in product
development is our ability to constantly align
our plans to whatever is, at the moment, the
best economic choice.”
— Don Reinertsen
4.
5. decision theory
The analysis of complex decisions with significant uncertainty
can be confusing because 1) the consequence that will result
from selecting any specified decision alternative cannot be
predicted with certainty, 2) there are often a large number of
different factors that must be taken into account when making
the decision, 3) it may be useful to consider the possibility of
reducing the uncertainty in the decision by collecting additional
information, and 4) a decision maker's attitude toward risk
taking can impact the relative desirability of different
alternatives.
Craig W Kirkwood, Decision Tree Primer, p1
7. decision tree
temperature sensor:
• development cost: $100k, revenue $1m
• probability of success: 0.5
pressure sensor:
• development cost: $10k, revenue $400k
• probability of success: 0.8
8. decision trees
Craig W Kirkwood, Decision Tree Primer, p4
EV=$400,000
EV=$310,000
EV=$0
EV=$400,000
10. value of information
• information reduces uncertainty about
decisions that have economic consequences
• information affects the behavior of others,
which has economic consequences
• information sometimes has its own market
value
Douglas Hubbard, How to Measure Anything (3rd edn), p145
11. measurement
A quantitively expressed reduction of uncertainty
based on one or more observations
Douglas Hubbard, How to Measure Anything (3rd ed.), p31
13. value of information
Expected Opportunity Loss (EOL) =
chance of being wrong x cost of being wrong
Expected Value of Info (EVI) = Reduction in EOL;
EVI = EOLbefore info — EOLafter info
Expected Value of Perfect Info (EVPI) = EOLbefore info
(since EOLafter info is zero if info is perfect)
Douglas Hubbard, How to Measure Anything (3rd ed.), ch. 7
15. not normally binary decisions — a continuum
humans are risk averse when the stakes are high
use utility functions; reduce stakes
don’t capture time dependence
use calculus monte carlo analysis
problems with decision trees
16. opportunity cost
In microeconomic theory, the opportunity cost of a
choice is the value of the best alternative foregone,
where a choice needs to be made between several
mutually exclusive alternatives given limited
resources. Assuming the best choice is made, it is
the "cost" incurred by not enjoying the benefit that
would be had by taking the second best choice
available.
Wikipedia
18. cost of delay
Task A: upgrade package to support credit card encryption
CoD: fine of $50,000 per day we’re not in compliance.
Duration: 2 weeks
Task B: Complete a feature for a key customer
CoD: we’ll close $100,000 per week with this feature
Duration: 1 week
21. exercise
Should I wait for the feature?
We have completed sufficient features for 85% of our
target customers.
We can:
• Take 2 more months to finish last 15%
• Launch what we have, add last 15% in next release, 6
months from now
Cost of delay for project: $200,000 / month
22. exercise
Delay 85% of functionality by 2 months:
$200,000 x 0.85 x 2 = $340,000
Delay 15% of functionality by 6 months:
$200,000 x 0.15 x 6 = $180,000
