The optionality fallacy

We are obsessed with optionality. Not sure what to do with your life? Most people will tell you to get a degree. Not quite sure what to do with this degree? Go to grad school. Still not quite sure? Get a consulting role at a big firm so you can decide what kind of job you enjoy. And so on and so forth. We fall prey to the optionality fallacy. As Erik Torenberg puts it, it can be “like spending your whole life filling up the gas tank without ever driving.”

The problem is not with optionality itself. The problem is that we tend to assume optionality is built by keeping as many doors open for as long as possible; by staying on the main road for as far as can go instead of taking the risk of making a wrong turn. The conventional path of accumulating optionality gives you reassuring but fragile options. In contrast, the best options—which involve lots of experimenting and tinkering—may feel riskier in the short term but will help you thrive through uncertainty.

Optionality as convexity

Traditional approaches to optionality assume a linear life curve, with a linear dependence on the parameters—do this, get that. People “follow safe paths that cap their downside, not realising that they also cap their upside,” writes Torenberg. He adds: “Many ambitious people, even though they understand this intellectually, still prefer the more conventional paths of accumulating optionality.”

It is often true that if all goes to plan, that is, if the actual parameters do end up looking highly similar to what they anticipated, following the traditional path will result for most people in a mostly predictable result.

But the reality is, life’s curve is non-linear. There are few things more uncertain and complex than your life path. Each day brings its own unpredictable challenges and random events. Inject a random adverse event, such as losing your job, or a lucky one, such as inheriting a large sum of money, and the pains or gains will often be amplified in a non-linear way.

How can you design a life that embraces the random nature of reality? By accumulating optionality to shape an approach to life which will result in larger gains than pains in a random environment.

Functions with larger gains than pains are nonlinear-convex. The graph below shows the effect of a random event which causes more gain than pain. Things go well? Great upside. Not so well? Limited downside. The performance curves outwards, making it convex. And optionality is what gives it these crucial properties. Because you have options, you can discard the results when something doesn’t go well, thus limiting your losses. This allows you to experiment more, take more risks, and increase your chances of a big upside while capping the potential downsides.

Optionality Fallacy: antifragile convexity curve with higher upside and lower downside

“It is in complex systems, ones in which we have little visibility of the chains of cause-consequences, that tinkering, bricolage, or similar variations of trial and error have been shown to vastly outperform the teleological*—it is nature’s modus operandi. But tinkering needs to be convex; it is imperative.” says Nassim Nicholas Taleb, author of The Black Swan and Antifragile. “Critically we have the option, not the obligation to keep the result, which allows us to retain the upper bound and be unaffected by adverse outcomes.”

*From the Merriam-Webster dictionary: “A teleologist attempts to understand the purpose of something by looking at its results. A teleological philosopher might argue that we should judge whether an act is good or bad by seeing if it produces a good or bad result, and a teleological explanation of evolutionary changes claims that all such changes occur for a definite purpose.”

Taleb calls the difference between the results of trial and error in which gains and harm are equal (a linear function), and one in which pains and gains are asymmetric (a non-linear convex function) the “convexity bias”—the more convex the function (bigger difference between potential harm and benefits) and the more random the environment (higher volatility), the larger the bias. As humans tend to hate uncertainty, we have a propensity to miss the volatility property.

In random, complex environments, convexity—as in optionality— is easier to attain than knowledge. “Under some level of uncertainty, we benefit more from improving the payoff function than from knowledge about what exactly we are looking for,” says Taleb.

How does this convexity theory translate to life decisions? First, accept that life is one of these highly volatile environments. Second, accumulate the kind optionality that allows you to harvest randomness by increasing your potential upside and lowering your potential downside. What does that kind of optionality look like?

Optionality through thoughtful tinkering

Most ambitious people spend a lot of time and energy accumulating what feels like optionality by competing for a degree from a reputable university, then a prestigious work placement, and so on. Very few incorporate calculated risk in their life plan. “Taking risks provides optionality (…) via learning and differentiation. If you go to an Ivy League school or elite consulting firm, you are one of hundreds of thousands. If you start a company, you are one of a very few who started it in the way that you did,” says Torenberg.

Accumulating popular skills may feel like a path to more optionality, but the issue is: we don’t know what we don’t know. We cannot guess what skills will be helpful in the future, what random events (positive or negative) life will throw at us. On page 186 of Antifragile, Taleb writes: “Many things we think are derived by skill come largely from options, but well-used options.”

In a complex system such as life, where you have limited visibility of the chains of cause and consequences, you are better off using trial and error. Tinkering and experimenting is a more efficient investment of your time than following a set path of learning which assumes an intrinsic value in specific skills and ignores the non-linear way life works.

Experimenting does not mean giving something a quick try and abandoning it if you don’t see immediate results. Taleb gives the example of technologists in California “harvesting Black Swans”: instead of investing based on narratives that look good on paper (assuming linearity), they opportunistically switch or ratchet up their investments. This whole process takes many years of tinkering. “Typically people try six or seven technological ventures before getting to destination—note the failure in strategic planning to compete with convexity,” writes Taleb.

To increase your optionality, apply the same to your life. “Accumulate optionality through differentiation, not conformity,” recommends Torenberg. It may mean taking a job in a new, unproven industry; investing in an emerging skill; learning an uncommon language; understanding a lesser-known culture; solving a hard problem few people are looking at. Rely on a series of experiments rather and avoid following a pre-defined narrative.

Take these experiments seriously. Stay focused and give them your all. As James Clear puts it: “Highly focused people do not leave their options open. They make choices. If you commit to nothing, you’ll be distracted by everything. The great irony of this is that by limiting your options and remaining focused until you master a skill, you actually expand your options in the long run. Life-changing optionality is a byproduct of providing great value, which can only be achieved through focus.”

And remember—you don’t only live once. One day you will be dead, but it takes about seven years to master something. If you live to be 88, after age 11, you have 11 opportunities to be great at something. Most people never let themselves die and cling onto that one life. But you can spend a life building things, another life writing poems, and another life looking for facts. You have many lives. Each of them is an opportunity to try something new and increase your optionality. Live them.

P.S. The following is a great quote from Mihir Desai I haven’t included in the body of this article, as it didn’t relate to building an antifragile life per se, but describes another optionality trap which is worth considering: “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. For a few, those destinations are in fact their dreams come true—but for every one of those, there are ten entrepreneurs, artists, and restaurateurs that get trapped in those institutions.”

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