“When you hold an option and the world moves with you, you enjoy the benefits; when the world moves against you, you are shielded from the bad outcome since you are not obligated to do anything. Optionality is the state of enjoying possibilities without being on the hook to do anything…
…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 marriage 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…
…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 students ignore the most important life lesson from finance: the pursuit of alpha. Alpha is the macho finance shorthand for an exemplary life. It is the excess return earned beyond the return required given risks assumed.
-Mihir A. Desai, “The Trouble with Optionality.” The Harvard Crimson. May 25, 2017
Alpha just means your returns over a benchmark. I found this editorial interesting and a little weird. If you are going to pursue outsized returns, then you also need to find a way to manage your downside risk. It’s great if you leave an Ivy League school and start a business like Microsoft or Google. But, this kind of alpha is exception, which is why people talk about it. Its no different than the lottery ticket. It is much easier to start a company and take risks when you know you can get your basic needs met from some kind of unrelated income. But, there is this tension. If you are getting your basic needs met, why are you starting a company for? Somewhere in that answer is the meaning of life.
cafebedouin.org 