Asymmetric Opportunities and the Cult of Optionality
applieddivinitystudies.com
applieddivinitystudies.com
This kind of thinking has infected corporate America, which is optimizing return based measures--typically IRR--rather than profit based measures. That kind of thinking will lead you to believe offshoring your fabs is a good idea, because is reduces assets in the denominator.
On the other hand, financial thinking can help you better understand the world. One of the more powerful insights that comes to mind is Merton's model of corporate capital structure. It turns out that equity is "equivalent" to a long call on firm assets and debt is "equivalent" to a risk-free bond and a short put on assets.
Seeing things this way tells you something about how firms are run. Equity owners (management) have an incentive to increase asset volatility, which increases the call value. This value is taken straight from the bond holders short put. This is why you see buybacks in situations where buybacks seem crazy (Intel in 8/2020).
https://www0.gsb.columbia.edu/faculty/ssundaresan/papers/Mer...
In uni, this difference was explicitly used to differentiate investors and financiers.
Investors are picky where they put their money and want profit.
Financiers want every dollar always working and covet IRR.
... of course, out in the real world it isn't so cut and dry.
I am under the impression that offshoring fabs is a good idea due to drastically lower labor costs and other costs such as complying with environmental regulations as well as legal costs arising from those regulations. At least it was, and now there may be supply chain advantages to the offshore fabs.
My buddy works at a huge old bank. When he complains about the bank job, I remind him the bank job is antifragile because huge banks are safe places (note; not investment banks doing risky stuff) -- this stability can translate into excitement and optionality for him in the other 20% of his life. Implicit in the notion of options which "cap your downside," is the fact you're willing to accept that downside. You can't do that if you're in a precarious position.
Universea might buy a lot of out-of-the-money puts, but they also hold vastly more money worth of bonds.
Also, that chart of long stock vs call options is dead wrong because the options are on a different scale from the stock. Long stock trades don't go into negative valuation. They go to negative ROI. Call options routinely go to zero valuation. when your option goes to zero, your ROI is -100%, not zero.
If you measure risk in terms of the percent increase necessary to recover a loss, then a 100% loss is an infinite risk. It's really, really dumb to YOLO all in on options because of the gambler's fallacy, and the principal of maximum pain. That's why risky options are best done in small bets. Luckily for some, even if you lose your money, you still have your life, so you haven't truly lost everything!
If anyone is interested in an excellent book on antifragility for business, I recommend Jim Collins' Great by Choice. The audiobook is read by the author and he does a good job.
TLDR: Antifragile is only 20% about optionality. It's 80% about how to reduce or even reverse risk. Don't tunnel vision the 20 and forget the 80!
I'll pass, thanks.
20% efficiency waste in salary is existential risk if it happens that:
- you get ill
- you get wiped because you have not diversified these extra 20%
- you get wiped because your 80% is wiped
In short, the strategy only works if there is no downside. As there is always a potential for a big enough catastrophe, correct antifragile approach is to never gamble (with your own funds) until you have existential risks covered.
If you have to ask "what will I do if bad outcome x happens" then you have not covered done existential risk.
I recommend putting in typical natural and manmade disasters.
This banker job? Worth about $0 in wartime. You better have some useful skills. Gambling on being rich enough for an escape or on people willing to work for you does not always pay either.
Most people do not have even basic existential risks covered. Such as having a place to live. Preferably more than one. Water to survive a few weeks. Or good enough friends as well as enough portable capital for a clean break. (Such capital is knowledge or easily portable equipment. Not currency, as WW2 teaches.) Even to some surprise some really rich.
Your buddy's job at the bank will likely be safe, but consider for some markets that it doesn't really matter because there might always be another job around the corner. Software developers in particular should not be doing 80/20 because of this, since the jobs currently act as a really good safety net. That job market has only experienced one black swan event (2001) and rebounded to even higher levels.
For the US, if democrats get off their ass and start pushing change like they promised, we'll have even better safety nets. Safe tactics will become wasteful tactics because 1) we're historically always recovering, and 2) the downside always seems scarier than the upside. You can spend too much on safety.
The Democrats have not had sufficient numbers in the last 20 years in the Senate to accomplish this outside of 2009 and 2010, when they got ACA passed, and unless DC/Puerto Rico get added and a few states go from Repub Senators to Dem, I don’t see it happening in next 10 years either.
Various banks failed three times in the meantime, besides that big event. Banking jobs have not recovered, they have been consolidated and automated away.
Talking anything about black swans in computer programming jobs is premature. They're too new to even hit one major upheaval, in the meantime having faced dotcom boom and bust...
You can seriously estimate cash value of health care, disability care or of retirement money, much like assets. Same with basic wealth.
The advice to take on risks only actually works for really rich people with most existential risks covered; as a counterpoint read on how many immigrants took serious risks and actually came ahead...