In his book Shoe Dog here is a young Phil Knight the founder of Nike on how Zen compliments optionality:
"But first Id need to change my whole approach. I was a linear thinker, and according to Zen linear thinking is nothing but a delusion, one of the many that keep us unhappy. Reality is non-linear, Zen says. No future, no past. All is now."
By cultivating your intuition about how nature works, Zen can show you how the world really works, not how you want it to. The world - and by that I mean your world - is dominated by events that do not function as linear. If the world were linear a tree would grow 1 branch and 1 single leaf that would capture all the the suns rays. However because a tree doesn't know where the sun will be it grows branches in all directions a) for balance and b) to harness as much of the suns light from as many seasons and angles as possible.
If nature were linear, a river would run from the top of a mountain to the sea as a rain cloud would pour only in 1 spot over and over again. Yet as everyone knows, it doesn't look like that. The terrain of the earth has vast arrays of river networks starting small and slowly converging together. The exact opposite of the tree yet strikingly similar. It isn't quite correct to say each uses optionality but that each are optionality. Each piece of the smallest part is just an iteration of a larger part. It can only be taken as a whole. Fractal. Perfect.
Later as he is just starting his nascent company he also takes a job as an accountant to supplement his income, and learn - 2 different forms of optionality:
"For starters, I invested a healthy portion of my paycheck in Blue Ribbons account at the bank, padding my previous equity, boosting the company's cash balance...Price Waterhouse Cooper boasted a great variety of clients, a mix of interesting start-ups and established companies, all selling everything imaginable--lumber, water, power, food. While auditing these companies, digging into their guts, taking them apart and putting them back together, I was also learning how they survived, or didn't. How they sold things or didn't. How they got into trouble, how they got out. I took careful notes about what made companies tick, and what made them fail."
This is classic optionality, it draws from the basic premise that one shouldn't put all ones eggs in one basket. Here is a classic barbell strategy as defined as Taleb, have one foot in the safe shallow water, earning a steady, dependable income, one that can be counted on in lean times. And the other foot in a speculative venture. One that will payoff wildly if it works out. Small downside - uncapped upside.
Additionally he is learning, from his second job as an accountant. He is getting paid lessons in how to run a business, see over and over real world examples of what people are doing to make things work. Even more important is observing what isn't working. Failure has more information within it. It tells a specific story. While success often is more general, failure is specific.
Here is the company's leading salesman and his boundless exploration of free options:
"Each new customer got his or her own index card...This database enabled Johnson (the salesman) to keep in touch with all of our his customers, at all times, and to keep them all feeling special. He sent them Christmas cards. He sent the birthday cards. He sent them notes of congratulation after they completed a big race or marathon. Whenever I got a letter from Johnson I knew it was one of dozens, he'd carried down to the mailbox that day."
By employing free convex options - giving gifts, Johnson is upping the odds of his ultimate success. Where luck does indeed play a huge roll, one where you don't know how much skill you have, the it is vital to play the long game and shoot as many bullets at the target as you can. Since there is no penalty for trying, you should do as many trials as you are physically and mentally able. Taleb says that assuming cost isn't too much of an issue, the 1/n where n is the number of trials that gives the optimal chance of hitting that home run. Make n as large as possible. Paying close attention to the results. Refine the data and tweak the methods like Google doing A/B testing to see how you can increase sales with each evolution. To become the best you must be a master at self improvement. The jet engine wasn't the result of sheer accident, but continued refinement, adjustments and upgrading. Through natural pandiculation to your own unknown, you will be buying options and keeping the curve as convex as possible.
Faced with an opaque future the only way to find which door contains the hidden prize is to have a hand in all of them. It's why dandelions scatter in the wind. Being too narrow or rigid in specialization, focus or growth leads to disastrous results.
In the Sierra Nevada mountains this last summer, I was taking a shuttle down to some of the more secluded parts of the park when I noticed there were thousands of large logs and stumps hulking along on each side of the serpentine road. The bus driver said something that instantly made me think of Nassim Taleb and black swan events. In Nov 2011 there had been a terrible wind storm called appropriately The Devils Windstorm. In the Sierras where wild weather is abundant strong winds occur quite regularly. However he said that this particular storm carried winds of 180 mph and came from the eastern direction sweeping westward. Now it wasn't just the wind alone that knocked these huge trees over, uprooting them and flattening large swaths of the forest, it was the fact that the wind came from the direction of the east that did the most damage. You see the typical wind, year in and year out, comes from the west and the trees had braced and built themselves up for years against the western wind. Indeed, the very trees that braced themselves the best from the western wind had grown the tallest and the fastest. Then on that one fateful night five years ago the raging wind was able to knock down trees hundreds of years old. In all it leveled 1/4 of the trees in the valley, and the rangers had to pass a bill through congress in able to get logging equipment to cut down the felled trees (no logging allowed in national forests - its protected land).
Similarly the 2008-09 financial crisis found many facing a wind from another direction. The majority of people had been long into stocks and real estate and they now found themselves facing a danger that they hadn't accounted for beforehand and they were too concentrated in a single area. This is why optionality is so important. It allows you to know in advance that you don't know anything, and rest comfortably. Convex optionality allows you to pick exactly what your cost will be - you just can't pick your benefit. If you are sufficiently diversified with convex options then the wind can blow in any direction and -over time - you will thrive.
This is why in my portfolio, I own every color of the rainbow. Not just in the financial market, but also in the real market - life. The trick is to own something that zigs while the others zag. Don't just be healthy, be intelligent. Don't just have money saved, be generous and give gifts. Don't just read - write as well. Use all the convex options at your disposal. You can't know in advance which ones will payoff - but you know that some of them will and they will more than pay for all all the options. Personally I take great joy knowing that everyday I'll have to throw my all against the tree of life and see what shakes loose. I like the struggle and I relish the fact that it is difficult. It's not supposed to be easy. Growth can only come from overcoming. Plants that are grown in a no wind environment are weak and limp while ones fighting against the elements day after day are robust and strong. We are the same.
Imagine - if you will- a house turned upside down. A pointed roof balancing the conglomeration of cement, brick, drywall, tile, plumbing and electrical components. Doesn’t appear too stable now does it. How about a good strong wind, think it will help the situation? Yet we see structures like this everyday, we see them our entire lives, and don't give them a second glance - trees.
Have you ever looked at a tree? I mean really looked at a fucking tree? What makes a tree a tree? What is it's raison de etre? How does it work? I think most people don't know or simply don’t care. Now, I'm not trying come across as some John Muir tree hugging nature worshiper. Looking at it from the eyes of design, form and function I believe that we are much more like trees than the dwellings we reside in.
A tree goes from one massive truck to many small branches, each branch a slightly smaller version of the trunk (a fractal) and it can happen for five or more iterations, leading to a complex organism than when fully grown, seems as if it was drawn up that way from some master blueprint or top down design when in fact it was just following a set of simple rules repeated over and again - a true bottom up process. Our knowledge of fractals points to basic instructions than give way to complex patterns. A linear modeled brain cannot handle exponentially increasing functions, and a rapidly growing tree is exactly that. Each iteration of growth increases the number of branches and leaves non-linearly from simple order.
So why does a tree grow so many branches and leaves? Because nature uses the ultimate tool - optionality. Without a brain or knowledge of the future, the tree doesn't know in what direction the sun will rise and charting its course through the day and season. The tree is blind, deaf and dumb with no central nervous system, evolution has equipped the tree to act in the optimal condition from its initial germination as a seed. It spreads in all direction because it doesn't know. The branches that do get sunlight pay for the branches that don't. The roots that find a water source pay for the roots that don't. In addition the tree doesn't know in which the direction the wind is going to blow, but being balanced it doesn't have to, by growing in all directions it in effect is creating equilibrium and that a strong gust on one side will cause the tree to pull back to counterbalance the force applied.
Optionality also lets the tree procreate and spread it's seed with equal ignorance (or care) for the future. In theory one single branch could produce all the seeds necessary for the tree to have 'children'. It’s increasing the likelihood of success by spreading around many seeds over all of it's branches. It is in effect betting on all the possible paths - ones that include wind, rain, animals, bad soil and harsh conditions. It's taking advantage of an asymmetrical property found in all of nature - convexity bias. In a nut shell (pun intended) convexity bias states that if you are on the convex side of the equation then given enough time you stand to benefit far more than whatever cost you put in, and no matter what random events the future holds - up to a point of course.
To have many options is preferable than to have few options and seems to be the way that nature works her magic. Similarly we humans seem to have a inborn convexity bias as well, and our minds work much the same way as the branches and leaves do on a tree. Have you ever wondered why it's called the tree of knowledge? Indeed even our synaptic connections work in bifurcating and branching like processes. Our trunk - or in this case our consciousness - takes in nutrients (thoughts) from all the branches of our minds and filters it only keeping the most relevant for our immediate survival. Here is Aldous Huxley in Door’s of Perception explaining:
“The suggestion is that the function of the brain and nervous system and sense organs is in the main eliminative and not productive. Each person is at each moment capable of remembering all that has ever happened to him and of perceiving everything that is happening everywhere in the universe. The function of the brain and nervous system is to protect us from being overwhelmed and confused by this mass of largely useless and irrelevant knowledge."
Simple rules dictate both trees and our very lives. Just like a simple rules will grow a complex beautiful tree, some simple rules you live by will create a beautiful and truthful life. The axioms that we live by matter! They are the functions that build our averages. The rules are made from a top down standpoint to explore the greatest number of options in order to exploit them for future use.
Lastly, just as a tree starts general and the proceeds along to become more & more specific. Each branch is moved and shaken over time by the environment, creating ever stronger branches and trunks. When was the last time you could say a good wind made your house stronger? Nature seems fine to let her creation evolve as the environment sees fit. As each breach bifurcates, it moves into new territory and maximizes what it can with the rules it’s given. This gives the tree tremendous flexibility to achieve its goal of growth & procreation. We too must stretch ourselves to do likewise. Each branch of our lives must grow naturally and allow itself to be molded and adapted to fit the environment.
Steve Jobs, newly ousted from Apple a company he co-founded, was searching the technology world for a new product(s) in 1986. He had just started his first new computer company NEXT without his old partner Steve Wozniak. So far it had been an uphill battle and his nascent company was far from being a powerhouse. Turning his formidable gaze towards other projects he settled on a small computer graphics division of Lucasfilm, Ltd. and renamed it Pixar Animation Studios. Now these graphics were primarily geared towards high tech architecture and engineering firms who would have use for their amazing 3D features.
However there happened to be a very small sub section of the company that was using the graphics to produce new and amazing animated shorts - the primary purpose of the animations were to showcase the incredible power to the propriety technology and processor. So far, this decision was a financial loser in a company that was bleeding money. The processors were very expensive and there was a very limited market to whom these units could even be sold. The animation department was an even bigger flop, barely generating any cash whatsoever and in fact costing the company thousands of dollars a day in overhead. Yet rather than scrap the unprofitable division Steve Jobs went with his gut and kept the unit around simply because he was amazed by both the technical prowess of the animators doing animations that had of yet never been done, but also by the burning passion and vision of the head of the department John Lasseter.
There was one meeting after a particularly bad quarter when the company was laying off people and projects in droves. Jobs was watching his once massive fortune from Apple stock dwindle with his recent acquisition. He decided against the advice of the other officers to keep the small animation dept going. Now this was a gamble with no hope for a clear payoff or even a real viable moneymaking history. But this option was one that would pay off most handsomely for Jobs and make him - 12 years later a Billionaire and the single largest shareholder of Disney. Yes you read that right Steve Jobs didn’t make most of his money with Apple but with Disney stock which he owned via Pixar being purchased by Disney in 2006.
Of course Jobs didn’t know any of this back in the early 90's while his small company was floundering. All he went off was his gut and the passion of what proved to be an invaluable asset in Lasseter. Soon the company was able to produce an animated short (Tin Toy) so good that it won an Academy award. Soon thereafter Pixar had agreed to do a full length animated film for Disney - you may have heard of it - Toy Story. Since then the company has rode a unequaled wave of success from Toy Story, Monsters, Finding Nemo and other blockbusters as well. Interestingly enough the company utilizes the very sort of optionality that Steve Jobs harnessed to make the company a success. They storyboard continually - generating literally thousands upon thousands of storyboards to make their films. A sort of bottom up evolution where natural selection of the best story rules the day and leads to smashing successes. This is optionality at its finest.
Take for instance the movie Monsters Inc. original idea featured a 30-year-old man dealing with monsters that he drew in a book as a child coming back to bother him as an adult. Each monster represented a fear he had, and conquering those fears caused the monsters eventually to disappear. Doesn't sound like much of a blockbuster now does it? However using their story-boarding technique, the writers were able to slowly generate the story as it currently stands, a monster who befriends a little girl and stops a sinister plot to kidnap more children. The film generated over $577 million worldwide. Not too shabby huh? Easy work? No. Definitely not, but therein is the magic of optionality. Although it does require work, the payoff is still disproportionately high. i.e. It's non linear. Its not you add one unit of work and you get back one unit of pay. Its more like you do one unit and get something greater than one. How much more? Impossible to say a priori. Really there is no limit. Even better the only downside is the work you do i.e. The cost of one unit. It will never cost you more than that one unit. This is the beauty of optionality. It allows you to pick your cost, but you can never pick your outcome. Its a wild ride, filled with possibility and potential. It makes life a gamble with unlimited upside. How high will it take you?
Let’s face it most systems are difficult. Complexity and obscure connections to reality are the rules rather than the exceptions. Most are based on theory and some are based on practice ad hoc, a lose simulacrum of the real world meant to fit the observed data rather than explain it.
"In theory there is no difference between theory and practice. In practice there is." - Yogi Berra
That quote just about sums it up. We all know that a theory can sound good, win the arguments and get you fully pumped up to implement then - failure. Either a failure to account for real world situations, failure to work or just a failure to stick with something because doing it day in and day out is hard. I've been there - I know.
Optionality is simple. It takes the birds eye view of the entire problem and lets you stand back and think, should I even be working on this at all? It won't answer the question should I run, jog or ride my bike today? Although it there are some baseline answers to such questions - more on that later. But it is stepping back one level and asking should I exercise at all? Now of course the obvious answer to this one is yes - but why? It used to be because exercise is good for you that's why. However, looking at exercise through the lens of optionality gives you a more complete picture. It is saying that the cost to exercise is relatively small - simply the time and effort you put in. But the benefit far outweighs the cost. I know that by doing 1 hour of exercise the cost to me will never be more than that 1 hour. But the potential benefits are huge: You can have a longer life, be more agile and better adapted to physical situations, have a better mood and improve brain function and sleep. All of this from 1 hour of exercise!
For me knowing the simple equation makes life quite simple. I know that if I'm on the positive side of the asymmetric equation then in the long run I'm bound to win. Life is going to give me more than I put in. It sounds greedy but it's not. That is how the universe operates. Is an oak tree greedy for releasing thousands of acorns each year? Of course not, it has simply found a way of harnessing optionality. One tree has the ability (however unlikely) of producing thousands of new trees every year. It's simply about harvesting grey swans - a term borrow again from the master Taleb.
So follow simple rules, "buy" convex options and don’t "sell" concave ones. If you fill your lifetime buying convex options, the slope of your trajectory will be continually increasing, and at an increasing rate. Don’t fret too much about how you’re going to do this over a life. As Mandelbrot showed in his book 'Mis'behavior of Markets, if you look at a stock chart of price over time axis, you'll notice that the chart looks the same whether you’re looking at the minute, hour, day, week or monthly time-frame. Thus stock prices are fractal, they are self-similar with respect to time. Analogously if you model your life by buying convex options hourly, then logically your life (knitted together with convex hourly options) will look like a convex option i.e. Known small cost followed by unknown unlimited upside potential. So in essence don't worry about having to perform in the long run, only concentrate on right now, on what’s in front of you. For we live in the eternal now, it will never be later only now. Don’t wait to start, start now.
Our lives, like trees are fractal. The right presence of now will lead to an entire life cut from the same cloth. The pebble is the same as the mountain. The spilled water running downhill the same as the amazon. The gentle breeze the same as a hurricane. The only difference is scale. So scale your life. Iterate the perfect form without regard for time, for time is just an illusion. For it is not time which defines the mountains of our lives, it is the pebbles.
All fractals are built using only simple rules iterated and iterated again and again. The simplicity gives rise to incomprehensible complexity. Once the complex patterns and payoffs begin to emerge and change your life, they are almost impossible to unravel and say with certainty the exact causes. However this doesn’t mean that they were caused by complexity. In fact all the complexity is caused by simplicity iterated over time. Our linear cognition can only process things in a 1+1 = 2 type of sequential logic. Optionality is different. It is exponential. As Steve Jobs said in his now famous Stanford, "that is only by looking backwards can we hope to see how the dots will connect. " Beautiful.