On Optionality

No obligation

"Nemo mortalium omnibus horis sapit” - Of mortal men, none is wise at all times.

Financial language can be ambiguous. Words like leverage and concepts like diversification can shift from narrow financial terms into much more general ways of understanding the world. For entrepreneurs, the idea of “optionality” is particularly malleable—and taken too far, it can be hazardous

Entrepreneurs talk about their desire to “maximize optionality.” They are referring to financial instruments known as options that confer the right to do something rather than an obligation to do something. For this reason, options have a “Heads I win, tails I don’t lose” makeup—what those in finance lovingly describe as a “nonlinear payoff structure.” 

When you hold an option and the world moves with you, you enjoy the benefits; when the world moves against you, you are protected from the negativity since you are not obligated to do anything. 

Optionality is the state of enjoying possibilities without being on the hook to do anything. One gets to eat their cake and have it to - for a small premium of course. 

For those beginning their careers working at consulting or investment firms create optionality because of the broad exposures (to industries, companies, and people) and skills these firms purportedly develop. Going to graduate school or starting a business creates optionality by enabling more opportunities than a narrow professional trajectory can provide. 

Working at prestigious firms and developing social networks are similarly viewed as enabling more choices and more optionality. Starting a business allows one to take on risk, execute ideas, and learn in real time. And of course, the more optionality, the better.

In contrast, the closing of doors and possibilities signals the loss of optionality. This language doesn’t only apply to career planning: Don’t be surprised to hear someone in finance talk about children as the death of optionality.

This emphasis on creating optionality can backfire in surprising ways. Instead of enabling young people to take on risks and make choices, acquiring options becomes habitual. You can never create enough option value—and the longer you spend acquiring options, the harder it is to stop. One fails to become a master of anything and lacks the focus to become preeminent in a field. Optionality can become antithetical to success when discipline is not enforced. 

The Columbia undergraduate goes to work at McKinsey for two years, then goes to Wharton Business School, then graduates and goes to work for Morgan Stanley and leaves after several years to work at Grayscale. Optionality abounds!

This individual has merely acquired stamps of approval and has acquired safety net upon safety net. These safety nets don’t end up enabling big risk-taking—individuals just become habitual acquirers of safety nets. The comfort of a high-paying job at a prestigious firm surrounded by smart people is simply too much to give up. When that happens, the dreams that those options were meant to enable slowly recede into the background. One is shackled with golden handcuffs. 

For a few, those destinations are in fact their dreams come true—but for every one of those, there are thirteen entrepreneurs, artists, and programmers that get trapped in those institutions.

Of course, this is not a pitiable outcome. And in fact, maybe those serial options acquirers are simply masking a deep risk aversion that underlay their love for optionality. Even if not explicitly stated, optionality was always the end rather than a means to an end.

In fairness, these optionality-obsessed professionals often wind up happier than the other type I’ve become accustomed to seeing: the lottery ticket buyers. These individuals are just one payday away from securing the resources they need to begin their work toward their true ambition, be it political, civic, or familial. They believe that one Silicon Valley startup or one stint at a hedge fund will allow them to begin their true journey.

While the serial option and lottery ticket buyers seem like different creatures, they are, in fact, close cousins. Both types postpone their dreams and undertake choices that they think will enable their dreams. But they fail to understand that all of these intervening choices will change them fundamentally—and they are, in fact, the sum total of those choices. Upon lowering their time preferences by taking roles that they truly are unsatisfied with they are building up capital to leverage in the future. 

The shortest distance between two points is reliably a straight line. If your dreams are apparent to you, pursue them. 

Creating optionality and buying lottery tickets are not way stations on the road to pursuing your dreamy outcomes. They are dangerous diversions that will change you.

By emphasizing optionality, these people ignore the most important life lesson from finance: the pursuit of alpha. Alpha is shorthand for an excellent life. It is the excess return earned beyond the return required given risks assumed. It is finance heaven.

But what do we know about alpha? In short, it is very hard to attain in a sustainable way and the only path to alpha is hard work and a disciplined dedication to a core set of beliefs. Attaining alpha requires focus, discipline, and ambition. Alpha is something everyone is seeking, yet mathematically only few will grasp.

Given the ambiguity over the correct risk-adjusted benchmark the idealistic Sharpe Ratio (think, does the juice justify the squeeze), one never even knows if one has attained alpha. It is the golden ring just beyond your reach—and, one must enjoy the pursuit of alpha, given its fleeting and distant nature. Ultimately, finding a pursuit that can sustain that illusion of alpha is all we can ask for in a life’s work. One must always have a golden ring just slightly beyond ones reach in order to continually push for excellence.