When do you book a flight and hotel for a conference?

When do you book a flight and hotel for a conference?

A friend recently booked a flight for a conference six months in advance. Another friend suggested they should wait. This is a great discussion to explore some of the subtleties of real options, and especially the lesser known fourth law:

“The value of options increases with uncertainty.”

The flip side of this law is that options have no time value when there is certainty. The option value collapses to the intrinsic value.

For my friends who are Cynefin fans, it means that options have no time value when you are in the “Obvious” and “Complicated” domains (oops, sorry Dave, I meant quadrants, all five of them). Options play a major role in the “Complex” and “Chaos” quadrants, which is no surprise as Dave Snowden used Real Options to help create the Cynefin Framework well before Olav and I started talking about them.

But here is the real kicker. Dave tells us that Cynefin is a multi ontological sense making framework. What does that mean in English? It means that Cynefin considers the Ontology, Phenomenology and Epistemology of a situation, or “How it is”, “How we perceive it” and “How we act upon it”. These three are all very different, but do impact upon each other.

Olav and I have given many talks on Real Options. The focus of much of those talks is about the Phenomenology of Real Options and Commitments. The third law of Real Options “Never commit early unless you know why” is about the Epistemology of Real Options or “How we act”. It says never to commit unless you have enough certainty or in other words, never commit unless the time value of the option is zero due to certainty. This statement weakens the phenomenology of the commitment by putting the emphasis on certainty before the commitment. The ontology is that there is never certainty, certainly not until the end of the universe. There is always a itsy witsy small chance. Uncertainty hides in that 0.001% chance. That itsy witsy small place that is home to the black swan. That itsy witsy small place according to the phenomenology which is actually rather large according to the ontology. In fact, the phenomenology is the exterior of the tardis whereas the ontology is the inside of the tardis. Two different dimensions, and Real Options tilts us towards the ontology.

So what does this have to do with booking flights and a hotel for a conference?

Lets handle the easy one first, the hotel booking. Most hotels give us a free option. They give us the option to stay in the hotel at a fixed price. The option expires and becomes a (financial) commitment on the day of the stay. Therefore as soon as we think we might go to a conference like Agile20xx where the hotel sells out, it is worth taking up that free option. If closer to the conference we decide not to use the hotel reservation, we simply cancel it, or even “sell” it (probably for kudos as currency rather than cash). In other words, hotels give away free options which is something that Booking.com is trying to monetize by allowing hotel to offer cheaper rooms if the guest pays in advance and makes a commitment.

Airlines do not give away free options. A more subtle strategy is needed. In addition, airlines use utility based option pricing models for their flights. As the flight date approaches the price goes up, especially as the flight starts to sell out. As a result, flights are often much cheaper if purchased well in advance.

For a big conference like Agile20xx that is often in a location that is poorly served by international flights, the routes are often illiquid. (Illiquid means there are few options). Illiquid routes often spike in cost. As such, as soon as I think I’m pretty sure I’ll go to a conference like this, I buy a flight. This is an option to attend. From experience, leaving the flight to Agile2006 too late resulted in a flight that cost £1400 whereas the flight the following year cost about £350. I had bought the option to attend for £350. The point I buy the option is the point at which I’m pretty sure I will attend.

Another key point about Agile20xx is that the conference pays a fixed fee rather than cover travel expenses. Most conferences pay for expenses, and possibly a fee. That means that the risk of flight costs going up is borne by the conference rather than the speaker. So the best option is to attend the conference as a speaker so that the cost of flight risk is managed for you. Either that or get a sense of how much flights cost change closer to the time of travel. I generally book a month before travel but have been caught out once or twice.

Sometimes we need to constrain a situation in order to make things “obvious”. Anyone who has to work with an ex-partner to coordinate holidays for children, or provide certainty of dates for work colleagues, or clients attending a training course will recognize this situation. In other words, sometimes we need to give up our own options and the ability to respond to uncertainty in order to make things easier for others. This in turn helps us.

So coming back to “When do I book a flight and hotel?”

  1. Book the hotel as soon as you think you will need it. You can always switch to a cheaper up front cost on booking.com closer to the time.
  2. Either book the flight as an option well in advance, or book the flight when you have constrained your options enough that the uncertainty is removed for other.

This post was inspired by a great conversation on Twitter between Gitte, Yves and Samantha.

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About theitriskmanager

A IT programme manager specialising in delivering trading and risk management systems in Investment Banks. I achieve this by focusing on risk rather than cost. A focus on costs can lead to increased costs. View all posts by theitriskmanager

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