Making a bad decision on purpose: option value and social search
Am I going soft?
I’ve been dabbling with paid search on one of the major social networks. The interesting thing is that we decided to press forward despite the fact that our “back of the envelope” calculations using an optimistic lifetime value estimate projected that this campaign will end up underwater.
I frequently rant about the value of running the numbers first but in this case we decided to “do it for strategic reasons”. More specifically, this campaign had high option value. In a situation like this, a simple ROI calculation may not be enough. Conventional projects with predictable outcomes can use straightforward estimates. When venturing into the unknown where the risks are greater and the future is uncertain, people often use real options as a way to capture the potential value of an opportunity.
So in this case, paid social search is a good fit for thinking about option value. Despite a lousy initial estimate, there is great potential in the medium. If this works, it could open up a big, new promotional channel. It could also be a bust. We’ll never know unless we try it.
So can you think of any high risk projects that have a small chance of a exponential return?