Why Optionality May Be the Only True Way to Attain ‘Freedom’ and ‘Wealth’

Be like a Hydra — cut off one head and two shall rise

A few days ago Tim Denning wrote about the lie of the digital nomad life and how being a human means doing things.

I completely agree with that. Humans are designed to work, not all the time, but yes, most of the time. And that too on something meaningful.

Yet, that’s not all he says that struck a chord with me. He writes “Freedom was simple: I wanted the ability to have choices.”

That’s the core idea I want to focus on. You see, if you focus on only one thing in life as your true meaning, you’ll be like the drug addict who wants to get more every time.

But with multiple sources of meaning and options, life is great.

Let’s digress for a while and explore optionality in much more detail.

The idea of optionality was given by my new all-time favorite author Nassim Taleb in his book Antifragile.

You can explain it to a 7-year-old like this:

“Sweetie, It’s the ability to have choices. If you only depend on your best friend to play with you, then what happens when she isn’t around? But if you have a couple of more friends, you’ll never be bored.”

But why does optionality matter? To answer that, let’s digress further.

What do you mean by the word fragile? Something that is easily broken and damaged, right? Like the fancy china, you keep only for special occasions.

Now, what’s the antonym of fragile? If you’re not sure, Google it. Google (at least in my location), says the opposite of fragile is robust — something that is strong and healthy.

But that’s not true.

The opposite of fragile is anti-fragile. And it’s fascinating that we don’t have a word for it. If fragile things break easily, robust things survive the chaos. But that doesn’t make them opposites.

The total opposite would be something that *gains *from chaos. Bam. That’s Antifragile.

In the words of Taleb,

Antifragility is beyond resilience or robustness. The resilient resists shocks and stays the same; the antifragile gets better. This property is behind everything that has changed with time: evolution, culture, ideas, revolutions, political systems, technological innovation, cultural and economic success, corporate survival, good recipes (say, chicken soup or steak tartare with a drop of cognac), the rise of cities, cultures, legal systems, equatorial forests, bacterial resistance … even our own existence as a species on this planet. And antifragility determines the boundary between what is living and organic (or complex), say, the human body, and what is inert, say, a physical object like the stapler on your desk.

In simple words, anything that gains from disorder and chaos is antifragile.

But why are we talking about antifragility? Why does it even matter? Now, even though Nassim wrote a monstrous book on the subject, I’ll be very brief in my explanation.

The biggest benefit of the concept of antifragility is nonprediction. In a world that is becoming increasingly complex, you cannot predict what would happen next.

If you don’t believe me, ask Wall Street if it predicted the crash of ’08 or the coronavirus crash. Except for a few people, (like Taleb), most of us didn’t see these things coming. And there will be things that Taleb also misses.

So if predictions are thrown out of the window, what can we do?

We can make ourselves antifragile. This means you can gain from chaos when others are suffering. That’s of course easier said than done.

Again in the words of Taleb,

It is far easier to figure out if something is fragile than to predict the occurrence of an event that may harm it. Fragility can be measured; risk is not measurable (outside of casinos or the minds of people who call themselves “risk experts”). This provides a solution to what I’ve called the Black Swan problem — the impossibility of calculating the risks of consequential rare events and predicting their occurrence. Sensitivity to harm from volatility is tractable, more so than forecasting the event that would cause the harm. So we propose to stand our current approaches to prediction, prognostication, and risk management on their heads.

Options Are the Vectors of Antifragility

Coming back to optionality, we can clearly see that options make us more antifragile in every scenario.

Options, as Taleb says, are the vectors of antifragility. Given that you have options, you don’t need to waste brain chemicals going crazy if something will happen or not.

You can just be prepared for it and exercise whatever option is advantageous then. This also means that you don’t have to predict, but only have to decide after an event has occurred.

And the only thing you have to do is to not do unintelligent things that make you fragile.

The best explanations of optionality and antifragility come from the stock market. Let’s say you want to make good money but have no idea what the price of the stick will be.

You know the business but just can’t predict the right price. Yet, you know that it’s going to go down, for instance.

Instead of shorting the stick, you can buy options to buy that stock at a lower price if it reaches a certain price. If it doesn’t, you only lose the amount you paid for exercising the option. But if it does, you can potentially make millions of dollars.

That’s the power of optionality — limited downside and unlimited upside.

Let me give you another example from the business world. When Richard Branson started Virgin Airlines, he wasn’t 100% sure it would work. And even if he was, he had to minimize his risk.

What he did is a classic example of optionality. He leased a plane from Boeing and structured a deal where he could return it if things don’t work out. Again, limited downside, unlimited upside.

You get the idea, instead of trying to predict what would happen, change your position to have options when others are gasping.

Don’t Be a Turkey: Why Does Optionality Matter?

As we saw above, for something to qualify as an option, it must give you limited downside and unlimited upside.

Let’s take another real-life example. If you start a business tomorrow investing a couple of hundred dollars into it, then you stand to lose only that. But the upside is unlimited — it can take over your life and even be more than what you’re making right now.

That’s optionality. This is why many people who considered their employers as their God, who could never fail, were destroyed in the recession.

This is the classic Turkey problem. What’s that? Let’s say you’re a turkey. A butcher bought you for thanksgiving but of course, you being a turkey don’t know that.

Now, he’s feeding you every day, you’re well taken care of and thus you believe you’ll be fine. This goes on for a hundred days. Then on the 101st day, he cuts you into pieces to feed others. Gross, I know.

Most people are positioned as a turkey. They see the past and think everything will be alright. This makes them complacent and relies on the possibility of things being right.

Unconsciously, they predicted the future — a future that doesn’t require them to take any action right now. We all default to that state unless we shift it consciously.

This is why, in today’s world, entrepreneurship may be safer than a job. No company can take care of you and will fire you if you’re increasing the cost. It’s not wrong, that’s how business works.

Freedom, Wealth and Optionality

Let’s come back full circle and see what freedom has to do with optionality.

Freedom and wealth are psychological states induced by an accelerating velocity of options created by the systematic pursuit of relatively ambitious, discrete opportunities — Taylor Pearson

Before we talk about freedom and wealth, one of the most important things to know about them is they are psychological, not objective.

People may have millions of dollars and still not be free or wealthy.

For instance, an immigrant coming into America would be overwhelmed and excited by the options that are present. He would feel his happiest going into Costco. Why? Because suddenly, he has access to a plethora of options that he never thought of.

But an American citizen wouldn’t feel that way. In the same Costco aisle, he’ll complain about the lack of dog food options and how the industry is tightly regulated — because he’s adapted to the options present around him.

This is the hedonic adaptation to options. That is why, in the above quote, Pearson mentions “an accelerating velocity of options.”

This explains how the psychological states of wealth and freedom are actually induced. And after a certain point, it may have nothing to do with how much money you have in the bank or where you live.

Any time you receive new options, you think your freedom has increased.

Having cash from passive income, for instance, is freedom. You can do whatever you want knowing that your basic needs are taken care of.

Let’s take another example. If you work in sales and have only one client, I’d guess you’re not sleeping well at night. The feeling of getting your business off the ground was great. But now, you’ve already adapted to that.

Then you fill your pipeline with ten more leads. Soon, you start worrying about how only two of them will do business with you. Thus you adapt to the new limit of options.

Simply put, to feel free and at ease, you need to be generating more leads at an ever-increasing pace. The famous copywriter Dan Kennedy always spent the first hour of every day on sales even if he had more customers than he could fulfill.

This gave him freedom (which really is psychological peace of mind) and a sense of wealth.

How to Generate Optionality and Be Antifragile

Going back to what Pearson talks about above, we can see that there are three ways in that definition to achieve optionality:

  • Systematic pursuit of

  • Relatively ambitious, and

  • Discrete opportunities

Systematic pursuit means that you keep taking action. For instance, the more articles I write, the more they have a chance to go viral and make my work known to a larger audience. Simply put, the more chances you take the more chances you have to be successful.

Relatively ambitious means going out of your comfort zone just a little bit every time. It’s hard to pursue opportunities that are dramatically out of your comfort zone. Think of it like a rubber band — you want to stretch it, but not break it.

For instance, if you have three kinds of debts, you might want to start by paying the smallest one instead of the one with the largest interest. This is because you need momentum on your side. And momentum begets momentum.

Finally, discrete opportunities are key to optionality. You need to find opportunities that are different; otherwise if one goes down, it will take everything else with it. For instance, think of Amazon. It started as an e-commerce business but years down the line it experimented with AWS. Now, a major chunk of its revenue and profit comes from that.

The counterintuitive key to optionality is to focus and say no to a lot of fine opportunities and look for great, discrete ones. Richard Branson says (I’m paraphrasing) that business opportunities are like buses on the road. You have to choose which one you onboard carefully.

Further, here are some ideas by Buster Benson on how to live an antifragile life:

  1. Stick to simple rules

  2. Build redundancy and layers (no single point of failure)

  3. Resist the urge to suppress randomness. (See Netflix’s Chaos Monkey)

  4. Make sure that you have your soul in the game

  5. Experiment and tinker — take lots of small risks

  6. Avoid risks that, if lost, would wipe you out completely

  7. Don’t get consumed by data

  8. Keep your options open

  9. Focus more on avoiding things that don’t work than trying to find out what does work

  10. Respect the old — look for habits and rules that have been around for a long time

Let’s stretch our example of Amazon, which seems like a great Antifragile company right now, to understand this:

  • It has multiple points and layers. If one business goes down, Amazon doesn’t shut. Its options are open.

  • Bezos lives by the ideology of tinkering continuously, i.e. making a lot of small bets (minimizing downside) and avoiding decisions that bet the whole company.

  • They have always optimized for things that will be true even after decades rather than finding what new things would arise. For instance, they’ve always known customers would want speedy delivery and lower costs. And paradoxically that is where all their ‘innovation’ comes from.

More importantly, it’s playing the long game, than the short game. And most people don’t do that since they’re not willing to look like idiots now. Yet those who are willing to be judged for a long time, often turn out to be geniuses in hindsight.

Think in terms of months, years, and decades rather than focusing on the day-to-day challenges, grievances, or occasional challenges.

Netflix’s Chaos Monkey is nothing but a server tool that kills entire servers and machines in their architecture randomly. This gives them a lot of input on how to prepare for the unknown.

Netflix takes a really huge chunk of internet traffic. But instead of trying to build a great server architecture, they’re just avoiding every possible failure (which are randomly self-induced) and iterating their way to success. In that sense, it’s like chipping away the statue until only the essential is left.

The Chaos Monkey teaches us to avoid failure rather than chase success. Chances are if you (your company, or whatever you do) is around for a decade, it’s kinda neat.

So embrace the Chaos Monkey. Generate a lot of options and be more antifragile. For that might be the only way to have true freedom, wealth, and happiness.

This article is for informational purposes only, it should not be considered Financial or Legal Advice. The barbell strategy of buying options is just used as an example. Consult a financial professional before making any major financial decisions. And finally, I’m open to criticism and learn from you in the comments.

Are you serious about becoming the best version of yourself? Get your free 5-day email course to Master The Art Of Personal Transformation

Written on November 23, 2020