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.
In Tony Robbins book Money Master The Game he interviews more than 50 self-made Billionaires, Nobel Prize winners, investment titans, bestselling authors, professors, and financial legends. From this large pool of insightful information and sanguine perspectives he took away 4 distinct traits in which they all share: (the numbered paragraphs are quotes directly from the book - my commentary is below each paragraph)
1) Don’t Lose - All of these Masters while driven to deliver extraordinary returns, are even more obsessed with making sure they dont lose money. Even the worlds greatest hedge fund managers, who you'd think would be comfortable taking huge risks, are actually laser focused on protecting their downside....As Paul Tudor Jones said, "The most important thing for me is that defense is ten times more important than offense...You have to be very focused on the downside at all times." Why because if you lose 50% it takes 100% to get back to where you started.
Avoid concave options! It sounds simple becasue it is. If you lose sight of this fact you will be amazed at what black swan events that will come out of the blue and hurt you. As mentioned in the chapter in Anti Fragile called via negativa, avoiding harm can be much more beneficial than seeking reward. Limit your downside. Make sure if something bad can happen it can't hurt you past a certain predetermined threshold.
For example say you exercise but are a pack a day smoker. According to optionality you'd be much better off quitting smoking than exercising. Why? Because the smoking is a negative option - it can kill you. You get small nicotine highs (small gains) with the looming threat of emphazima or lung cancer (large loss). It's the equivalent of selling out of the money PUT options on the SPY and collecting small premiums then having a 1987 black Monday crash happen and wipe out your entire life savings in a matter of seconds.
2) Risk a Little to Make a Lot - Each of these Hall of Famers without exception looks for home runs! They look for investments where they can risk a little and make a lot. They call it asymmetric risk/reward.
Sound familiar? By now it should. Although they are talking about the investment world, here I'm showing you that this also applies to your life and decisions you make every day from the food you eat to the choice to read a book or watch the news. Seek upside all the time. You can't know what or when the big moves will happen, but that’s ok. Just know that if you’ve eliminated the downside and are 'buying' convex options within your own life you are bound to be way ahead over time.
3) Anticipate and Diversify - The best of the best anticipate; they find the opportunity for asymmetric risk/reward. They really do their homework until they know in their gut that they are right -- unless they're not! And to protect themselves, they anticipate failure by diversifying.
Ray Dalio - the head of the world largest hedge fund knows enough to know that he doesn’t know anything - nobody does. We can cannot know what the future will hold, all we do know about the future is it will contain events that we don't know currently, because if we did then it wouldn't be the future. So the only way for you be able to gain from all the convex options is to spread them around, don't be too concentrated in one particular field. This is the method nature uses. Every tree, plant and flower doesn't know where it's progeny will grow. It doesn't have to. All it has to do is spread it's seed (positive options) in every direction. So following this advice, read all you can about diverse subjects. Try new things, meet new people and ask a lot of questions. Be curious. As John Wooden said "You'll be amazed at what you learn after you know everything."
4) You're never done - Contrary to what most people would expect, this group of achievers is never done! They're never done learning, they're never done earning, they're never done growing, they're never done giving!
This is the simple advice offered by Phil Knight - just keep moving forward, no matter what. If you get knocked down dust yourself of and fight again. Learn from your mistakes and befriend failure. View it as the oracle of wisdom that it is, as it's giving you valuable information, much more than information about what works. When scientists design experiments, they do so with failure in mind. They know there is so much information to be learned about why something didn't work the way it should have.
When I heard Nassim Nicholas Taleb first discuss optionality in his book Antifragile, a fusilade of lightning bolts shot through my cerebral cortex. Taleb said that optionality was like having the philosopher’s stone - the secret ingredient of transmuting lead into gold by way of alchemy, "I truly believe that the operation I will discuss--based on some properties of optionality--is about as close as we can get to the philosopher's stone". Wehn a someone as intelligent as Mr Taleb says that something is the most important discovery in the natural world - I listen. Through example after example he goes on to show that it had been responsible for every invention, leap and progress we've had in human history and evolution.
Naturally that lead me to start thinking, and soon I had drawn parallels to other applications. Life is Fractal - a term coined and invented by the late genius Benoit Mandelbrot (Taleb's mentor BTW) who reinvented mathematics and "the art of roughness" showed that a grain of sand and a mountain are simply different scaled versions of looking at the same thing, much like a tree branch is a smaller tree and so forth.
If optionality was responsible for almost all of human history, then it perforce must be responsible for my own history and thinking. Additionally there must be options I'd exercised before in my own life without knowing it - at least consciously. I began to search for signs of options within my own immediate sphere, and what I found amazed me.
While driving I checked the rear view mirror and noticed the car behind me was tailgating much too close. It dawned on me that by tailgating he was excising a negative or concave option which is a small gain (slightly faster speed) with the threat of a large infinite loss (car accident/loss of life). It was one of those voila moments where reality shifts and you see life through an entirely new set of eyes. I began to view almost everything I saw and heard through the lens of optionality, a binary choice, either concave (negative) or convex (positive).
I searched the web for more examples of options (not the financial kind) that people have discovered. Nothing. I thought 'wow that's crazy!' How is it that nobody seems to be discussing and analyzing this? How is no one addressing the market for this as there are so many free (or nearly free) options people could be exercising but aren't. Whenever I see a lacuna in knowledge, that I very much wanted to find more about, I did what any hardworking bookworm would do - I researched the hell out of it to see what I could come up with. Now to be fair I did find some books which addressed it - Little Bets, and The Startup of You - although excellent they were more focused from the business side and didn't specifically tackle and list the many options at every person’s disposal to develop a method to making decisions.
Soon I began to notice that many of the biographies that I read included many similar convex options. Indeed many of these business and world leaders who have shaped human history through science, culture, art and philanthropy were quite adept at using convexity to their advantage. I believe they had a strong intuition or bias towards convex options without knowing exactly why. This asymmetry gives the holder of the convex option an almost unfair edge. By employing this simple method over and over again throughout time, mountains get moved.
This website - dear reader - is my humble attempt at optionality. In short it's a meta-option or using optionality on optionality. Now many of the methods I've distilled are not revolutionary, as that isn’t the point of this website. Per the great physicist Richard Feynman, "Don't listen to what I say; listen to what I mean!" The importance lies with breaking down the methods behind the madness and the simple equation behind all the greatest achievements in human history. With this understanding you can begin to apply them to your own life. I'm a big believer in the power of methods or systems. The reason Ray Kroc was able to build McDonalds into the world largest fast food chain - he developed a system to make sure the quality was the same from Alaska to Alabama to Auckland. By following this system a franchisee was able to iterate a meal and experience customers were having at the original McDonalds. Or if you prefer Starbucks - it did the same with similar results. The key was the system, developed and refined over time, changed and tweaked with real world feedback and failure analysis.
I hope that you - the reader - will take away some sort of shifted perspective and look upon the world with this unique lens. It's given me much sharper focus and a renewed clarity when facing an opaque future. I have eliminated concave options and worked on identifying & harvesting convex ones into my life. So far the results have been nothing less than outstanding. This blog post is the natural extension of this continual optionality hunt. Knowledge sharing is one of the greatest options that one can exercise. For if Taleb never wrote his book, and kept his views to himself I never would have gone down this road of asymmetric growth. The convex life isn't some mantra or empty platitude. It's a path, a method for living a life with brio and thriving in a complex world.
Let me elucidate further: convex options need to be set free upon the world. They are ideas, thoughts, examples and facts that can’t be captured but can be (sort of) harnessed, as they are by hedge-funds, venture capitalists and pharmaceutical companies. Optionality cannot be nominalized i.e. turned into a noun – it is a verb, a word describing action. Optionality is the very act of creating something greater than the sum of its parts, and then watching as your creation does things unimaginable. Growth and change have never been more exciting, I can't wait - you come too...