Black, Scholes and Merton received a Nobel Prize for calculating the present value of a future option (choice) when you know something about the future possible outcomes. In most cases, knowledge about the future has value. So what's the importance of knowing your future? It could be very valuable. Let's talk about unlocking value in your personal options. For more on real options, email me and I'll send you a paper I wrote about them.
Without getting too technical, the value of any real option is based on how far in the future the event is from today's date, the discount rate and the distribution and value of possible future events. To assess the future value of your professional career, you must fold back your options in terms of sequential outcomes.
Here's a simple example (see "Option Tree," on page 40). Action 1 (job application) leads to company A or B. Action 2 (getting a CFP certification) at company A leads to job C (70% chance) or D (30% chance). However, Action 2 at company B leads to job B (80% chance) or E (20% chance), and you can also take Action 3 (professional sales training) at company B, leading to job D (80% chance) or F (20% chance).
Each job has a different salary/bonus and potential for advancement. They all have different expected values for you. I folded back the expected values for each company. While the best opportunity might be at company B, it could lead to a lower paying job for a couple of years, leading to a lower possible value.
Let's apply the option analysis to a career decision I made 34 years ago: Did I want to go to graduate school (see "Higher Education?" on page 40)? If so, what kind of education might be the best financially?
I thought about law, business and science. An MBA offered the widest range of career opportunities; law was in the middle and a technical/scientific degree was the narrowest.
I opted to look at business and law schools. That education is expensive, so I looked at the potential financial outcomes as a real option. The value was increased earnings over my lifetime, less the cost of school. I compared that with keeping my then current job.
The positive number led me to apply to school. Obviously, my career outcome won't happen to you. However, developing relative values for your possible career paths can help you create your best financial and professional future.
LOOK BEFORE YOU LEAP
Management guru Peter Drucker said, "The best way to predict the future is to create it!" Kautt's corollary: "The more options you create for yourself, the better the chance of one you really want happening." Try to configure your current situation to give yourself plenty of ways to move forward.
For example, get more education across a broad spectrum to give yourself more options for creating value within your firm and with your clients. Being part of a growth-oriented firm will give you more job options, whether in client relations, operations, management or business development.
Here's something not so obvious, especially to younger professionals. Waiting, watching and exhibiting patience sometimes can increase your career options. How many times have you heard someone express regret for acting too quickly? That usually happens when that person didn't consider all of their future options-didn't see, and therefore didn't diagram all their possible futures-and certainly didn't wait for these opportunities to unfold.
While we've all heard "time is of the essence," Kautt's corollary is: "Decide in haste, repent in leisure." Hasty decisions can hurt or even derail a 40-year professional career.
Your future isn't guaranteed, but you can put relative values on various future career paths. Think of it this way: You use financial models to determine clients' financial outcomes to advise them on their financial futures. In the same way, you can compare various "futures" for yourself using a simple real option valuations algorithm. The Boy Scout's motto is: "Be prepared." Kautt's corollary is: "Prepare for your tomorrows today, and they will look a lot like you expected them to."