Optionality: Making Calculated Mistakes For Guaranteed Success

Optionality is business jargon that refers to the feature of certain financial contracts that gives the holder the right to execute a transaction at a predetermined price, within a specified timeframe. Holders of these options contracts can choose to exercise them if the market conditions are favorable, and can let the option expire without any obligation to buy or sell the commodity or share. It is highly valuable since it provides flexibility and potential for risk management.

We love optionality. When we are not sure what to do with our lives, having every door open for as long as possible seems like the best choice. But that is not necessarily true. The best options require trial and error, experimenting and tinkering, and feel riskier in the short term but help us thrive. It is true that if all goes to plan, following tradition will result in a relatively predictable outcome. Yet life is non-linear. Nothing ever goes exactly as planned. There are few things more complex and uncertain than living itself. Each day is unpredictable, with unanticipated challenges and random events.

Inject any adverse, unexpected event into your day-to-day and everything can break down. Losing your job, or a lucky one, such as inheriting a large sum of money or winning the lottery, can collapse your plans in an instant. The only way to design your life in a way that embraces and endures the random nature of reality is by following a function of larger gains than pains in a random environment. That is, by living with an approach that ensures you win even if everything that’s unpredictable happens. Optionality is what gives you this power: because you have options, you get to discard the results when something does not go well, limiting your losses. This allows you to experiment, take risks, and increase your chances of a big upside while capping the downsides.

Optionality is about changing your frame of mind. You have the option, not the obligation, to keep the results of your tinkering throughout life. This should empower you to be unaffected by adverse outcomes. Most people spend the majority of their time and energy accumulating what feels like optionality: a degree, a job, a skill. But they are making a fallacy. In life, you have a limited visibility of the chains of cause-and-effect. You are better off relying on trial and error. Experimenting is a better use of your time than following a set path which ignores the non-linear pattern life follows.

The core idea is to have lots of options with low costs and unlimited gains. Since the future is unpredictable, when you inevitably run into those costs, your gains with outweigh them. Venture capitalists cannot know which startup will succeed. So they increase their optionality by investing in many startups at once, knowing most will fail. But when one succeeds, they cash out with exceptional returns, the losses on the failures far smaller than the gains on the wins. Akin to allocating a percentage of your assets in high-risk investments, this lens applies itself to most other areas of life: having a steady income from a low-intensity job while working on a side project with an unlimited upside; having one product that guarantees revenue while you experiment with new products and services in business.

Real life implications of optionality:

• Personal development: learning multiple languages increases job opportunities and global mobility, and focusing on skills that compound over time and apply broadly across fields is much the same;

• Finance: diversifying your investment portfolio will offer optionality to benefit from the growth of various sectors while limiting your exposure to any single failure, so allocating a portion of your portfolio in high-risk, high-reward funds while maintaining safe, stable investments is wise;

• Career: gaining cross-functional role experience creates options to switch careers or industries later, which is why specializing too early is a massive mistake;

• Entrepreneurship: creating a minimum-viable product allows entrepreneurs to test an idea with minimal investment and risk before scaling, and this can be applied broadly to validate ideas with minimal effort and resources, maintaining flexibility to pivot if and when necessary;

• Relationships: building diverse networks opens doors to unexpected opportunities, collaborations, and partnerships, and focusing on genuine connections in lieu of immediate gains yields hidden optionality;

• Fitness: developing a balanced fitness routine ensures you are prepared for various fitness challenges without over-specializing in one area, which is why we engage in varied activities of strength, endurance, and flexibility, to maintain overall health;

• Decision-making: delaying irreversible decisions until more information is available and making reversible ones as quickly as possible taps into optionality.

How you might employ optionality as a mental model: (1) increase your choices without commitment, developing skills, relationships, and resources that open up possibilities without tying you down, such as by acquiring transferable skills—programming, public speaking—to be able to pivot between careers; (2) limit downside risks, entering situations where potential losses are capped while gains are unlimited, like by investing in startups to expose yourself to high rewards while limiting the initial sum; (3) create asymmetric opportunities, seeking situations where small investments of time, money, and effort can result in outsized returns, like publishing a book online; (4) leverage optionality in uncertainty, avoiding over-commitment to a single prediction in volatile environments, like by launching multiple pilot projects in a new market to identify promising opportunities before plunging in; (5) maintain redundancy, building backup options to reduce your reliance on any single pathway.

Thought-provoking insights. “The more you learn, the more optionality you create.” shows how knowledge compounds into unexpected opportunities. “Optionality is freedom in disguise.” highlights that options aren’t only about decision-making, but about autonomy and control over our path in the broader sense. “A system with high optionality thrives in chaos.” marks how optionality transforms uncertainty into opportunity, from a threat to a potential advantage. “You don’t need to predict the future if you prepare for multiple futures.” refers to how optionality makes forecasting less critical. It is a versatile and powerful mental model that underscores the importance of keeping options open. Maximize your outcomes using optionality. Make sure that, even if you fail in the majority of your ventures, the few you succeed in propel you forward.