Tidy First?

Chapter 27. Options Versus Cash Flows

Here we have the economic tug-of-war that makes “tidy first?” such an interesting question:

• Discounted cash flow tells us to make money sooner with greater likelihood and spend money later with less likelihood. Don’t tidy first. That’s spending money sooner and earning money later. Maybe don’t even tidy after or later.

• Options tell us to spend money now to make more money later (even if we don’t currently know exactly how). Absolutely tidy first (when it creates options). Tidy after and later too.

Tidy first? Yes. And also no.

Now, there are times to tidy first for sure. When:

cost(tidying) + cost(behavior change after tidying) < cost(behavior change without tidying)

then absolutely tidy first. It’s still easy to get carried away and tidy too much, but set and maintain boundaries for how far you’ll go and you’ll be fine.

The more fraught situations occur when:

cost(tidying) + cost(behavior change after tidying) > cost(behavior change without tidying)

You might still want to tidy first, even though short-term economics discourage you. You may be implementing a series of behavior changes, all of which benefit from the tidying. Amortizing the cost of the tidying across all the changes might make sense, even discounting the cash flows.

Tidying first may make economic sense in spite of discounted cash flows if the value of the options created is greater than the value lost by spending money sooner and with certainty. We are firmly in the ...