In Defense of Optionality

I recently came across some articles speaking ill of optionality. I was triggered. Optionality is one of my favorite ideas and I see it applied everywhere, from sports to investing. Simply put, optionality is low cost experimentation. However, in David Perell’s recent newsletter he lays out how he thinks optionality isn’t a useful idea:

The Cult of Optionality: I was afraid of commitment for too long. I thought that committing to a project for multiple years would limit the number of opportunities at my disposal. But the opposite has happened. Branding myself as “The Writing Guy” and focusing full-time on Write of Passage (which I intend to do for the next decade) has paradoxically increased the number of professional opportunities available to me. Luckily, many authors have made this point more eloquently than I just did. I recommend this piece from Byrne Hobart, this one from Applied Divinity Studies, and especially this one from a Harvard professor named Mihir Desai.

David Perell’s Friday Finds

The articles brought up a number of points to show how optionality wasn’t a useful tool, from job hopping to insurance to marriage. And I agree with all these points. Switching jobs, buying too much insurance, and avoiding long term commitment aren’t great decisions.

I agree with those points, but the problem is that this isn’t optionality. Switching jobs, over-insuring, etc… aren’t low cost. They are very high cost with limited rewards. Those are the kinds of options you aren’t looking for with optionality. They are confusing the act of having a lot of options with optionality. Including optionality in your thought processes doesn’t mean avoiding commitment.

The future is a crazy place and reduced path dependency helps navigate that. I like to think of optionality as having different paths (either to the same destination or a to-be-determined destination). One path may seem obvious right now, but in the future crazy things happen. Say you are attempting to travel from the Eiffel Tower to the Arc de Triomphe. One path may seem obvious, but then you run into traffic and take a turn, then an accident, so you turn again and finally construction. You had to deviate from the original plan, but it got you to your destination faster. Having numerous options reduced your path dependency at a low cost.

Yet, no one would argue that the best path forward is to not move. Maintaining more paths to your end destination is useless if you never take them. The key is to keep moving, preserving your gumption. But never stop generating low cost, high upside options. Instead of job hopping, you create a blog/Twitter account on your favorite ideas. Instead of over-insuring, you identify areas of asymmetrical risk and place small bets. Optionality isn’t quitting your job or avoiding commitment. It’s low cost experimentation that reduces your path dependency. 

David Perell thought he was reducing his optionality by focusing on writing, but he leveraged his writing into a following which then led to angel investing. Unknowingly, David Perell was secretly increasing his optionality through his business model. He built a network, which created an autocatalytic effect which has led to an overflow of optionality. As Nassim Taleb said, “Optionality can be found everywhere if you know how to look.”

Like many things, it all comes down to balance. The best way to preserve optionality might be to never move at all, but preserving optionality is never our goal. We want to use optionality as a tool to achieve our goals. To consider optionality isn’t to treat it as an end, but instead a means to an end. You tinker as you run your business (or life), you don’t stop to tinker. Move fast and break things, but do it while engaging in low cost/high upside experimentation.

The future will bring chaos, but optionality finds you paths you never even knew existed.

Author: fatbabyfunds