Optionality is for Innumerate Cowards

These mountain climbers probably haven’t even heard of put options.

Why Optionality?

Paying for Insurance

  1. It’s a bad deal financially.
  2. It’s utterly cowardly.

Cash, Uber, Open Calendars, Loneliness, and Other Forms of Optionality

  • Cash is a universal call option: cash is the right to buy any asset for its future market price, even if that market price is lower than today’s. This is a tautology, but it’s a useful reframing: when you hold cash, you’re betting that future asset prices will represent more attractive purchase opportunities than today. Interestingly enough, this tautology gives us a neat way to reframe the truism that volatility is highest during market declines: higher asset volatility increases the value of an option, so all else being equal, volatility should raise the value of cash-the-option relative to the value of the volatile asset.
  • Ride sharing rather than car ownership is an optionality trade: you’re not strictly buying or selling optionality here. A car is an option to get from point A to point B for the cost of gas and depreciation, with the caveat that Point A and Point B are where you parked. You pay a lot upfront for that option, but it saves you money if you drive a lot. Ride-sharing economics illustrate the economies of scale present in selling volatility: any one driver who promised 24/7 pickup/dropoff for one subscriber would have a lot of downtime and slow arrival time, but a whole network of drivers mutes the impact of spikes and lulls in demand.
  • An open calendar is a call option on opportunities: In one of the classic Pmarca blog posts, Marc Andreessen advises keeping a completely open schedule. It’s a compelling idea, especially given his case study — Arnold Schwarzenegger’s casual career pivot from movie star to politician in charge of one of the world’s ten largest economies. This schedule works well for people with a combination of traits: no major project absorbing their time, and enough fame/status that they can just demand that everybody else block off time on their calendar for a maybe meeting with you. But try it before you’ve achieved Andreessen/Schwarzenegger fame, and you may find that the result is that you lose out on productive meetings altogether.
  • Loneliness: an optionality-maximizing strategy: Close friends and family drastically curtail your freedom, in ways large and small. A few years ago, I applied for a job on a lark, got it, and moved to a different coast for six months. Earlier this year, I moved less than a mile, with two kids and a pregnant wife; it was arguably harder. At a smaller level: literally as I wrote the last sentence, my one-year-old (Happy birthday, Mallory!) blew a giant spit-bubble on the Escape key. Not a specific problem I had to deal with when I was childless, but still a net win. I suspect that delayed family formation among millennials is a general expression of their desire to maximize optionality.

The Solution

  1. If you actually implement them as an order, you’re basically pre-committing to panicking in proportion to everybody else. This is dangerous behavior, and it tends to exacerbate market volatility. [7]
  2. If you implement mental stop losses, you’ll generally find that you don’t have the fortitude to execute on them.




I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/

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Byrne Hobart

Byrne Hobart

I write about technology (more logos than techne) and economics. Newsletter: https://diff.substack.com/

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