Software Design Decisions as Real Options

Despite their status as foundational concepts in software engineering, many software design decision-making principles and heuristics, such as information hiding and the delaying of design decisions, are still idiosyncratic, ad hoc, poorly integrated and not clearly based on any sound theory. In this paper, we develop an economics-based approach to providing a firmer foundation for software design decision-making heuristics. We start with the premise is that many software design decisions are essentially about when if ever to make irreversible but delayable investments of valuable resources in software assets of uncertain value. This formulation reveals an analogy between software design decisions and real options, which are capital investment analogs of financial call options, for which there is a well-developed theory and body of knowledge. In particular, the theory of real options captures precisely the idea that there can be significant value in having flexibility to wait for better information before committing valuable resources to develop or obtain assets. The options-theoretic nature of many software design decisions allows us to bring option theory to bear on an analysis and refinement of critical, widely employed software design decision-making heuristics.