The Use Of Options In Negotiations

Larry Price
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Wednesday - January 13, 2010
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One of the most popular words being used by Hawaii lawmakers these days is “option.” I suspect our law-makers believe that most of the tax-paying public is familiar with the meaning of the word. But, just in case, a few words of caution are in order.

Options are used more often than not for decision-making. An “option” is not simply any alternative, but one that permits a future decision following the revelation of additional information. It is a word most used in financial affairs.

Crucial to the idea of an option is the exercise of human will in the decision. For example, in government work, officials can install extra wiring for possible future needs or make freeway bridges wider than freeways. Options can be contractual or non-contractual. Contractual options are merely agreements with another party to provide future decision alternatives. Non-contractual options exist when we create the possibility of deciding after the revelation of information with the same set of alternatives.

This is one of the problems with the submission of the environmental impact statement document regarding the controversial elevated rail system. A document of this nature wants assurances that all other alternatives in design have been investigated and that funding for the project is secure. Someone has to “sign off” on the document to the satisfaction of the federal government. In our current circumstance, the City and County of Honolulu has to sign off on the document first, then it’s sent to the state Department of Land and Natural Resources, and then gets the governor’s signature only after all options have been exhausted.

Many people are familiar with escrow, which is a contractual option that allows one party to withdraw from an agreement easily if the other party doesn’t fulfill its commitments. In any case, options, if handled correctly, can create value, but seldom do they work when agreement or contracts become politicized. An option affords us at least the possibility of adjusting the decisions the government makes in light of experience. The value in the option derives from the likelihood of such an adjustment.

Said another way, when one politician criticizes another politician about not choosing better options, he or she is, in all probability, laying down a public smoke screen to discredit the other politician’s decision-making process for political gain. A more legitimate question when complaining about generating alternatives would be: What options could and should be created?

Options result from recognizing or creating new decision opportunities in anticipation of the total or partial resolution of uncertainty.

Anyone who has analyzed a copy of the recently negotiated Hawaii State Teachers Association contract (Ratification Copy 2009-2011) would have to agree that there aren’t many viable options in the language of the ratified copy. One can evoke options by asking first whether one would be in a better position to make a decision after the revelation of one or more uncertainties.

Suggesting more options after the fact is not a good idea. A formal decision analysis was made because any option’s cost would exceed its value, and, as everyone is well-aware, the state coffers are short by $1.2 billion.

The time for investigation of any feasible options is probably long gone by now.

Correction: Last week’s column said a dog in New York gave its owner the swine flu. It was actually the owner who gave his dog the flu.

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