Optionality and Education

This post introduces optionality, optionality in the context of foresight and then raises implications for education.

Discussing Optionality

A bit ago, both Tren Griffen and Nassim Taleb discussed “optionality” on their blogs.

“Optionality” refers to an investment decision where the reasonable upside is much larger than the reasonable downside.

Here are some of Tren’s thoughts on optionality:

Optionality is lost when you’re initial investments are so large, you cannot afford to abandon your initial plans:

“A rigid business plan gets one locked into a preset invariant policy, like a highway without exits —hence devoid of optionality.” I am at my self-imposed 999 word limit so what follows including this quotation must largely stand on its own without commentary…

“Optionality… explains why top-down centralized decisions tend to fail” …

“Like Britain in the Industrial Revolution, America’s asset is, simply, risk taking and the use of optionality, this remarkable ability to engage in rational forms of trial and error, with no comparative shame in failing again, starting again, and repeating failure.” Entrepreneurs harvest optionality when they tinker and experiment as they run their businesses and as a positive externality benefit their city/region/nation/the world in the aggregate by generating productivity and genuine growth in the economy even if legions of entrepreneurs may fail. Taleb: “Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty. You are the source of our antifragility. Our nation thanks you.”

Optionality in the Context of Foresight

Unlike rigidly planned investment strategies, optionality emphasizes only maintaining flexibility and recognizing success when it happens:

“If you ‘have optionality,’ you don’t have much need for what is commonly called intelligence, knowledge, insight, skills, and these complicated things that take place in our brain cells. For you don’t have to be right that often. All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur. (The key is that your assessment doesn’t need to be made beforehand, only after the outcome.)” Being able to make decisions which do not require correctly forecasting the future is a wonderful thing. Not one of the great value investors identified in the series of posts in this blog relies on macro forecasts of the future. Instead, value investors use the optionality of cash to buy after the outcome exists (i.e., a significant drop in intrinsic value). Regarding venture capital, Warren Buffett believes: “If significant risk exists in a single transaction, overall risk should be reduced by making that purchase one of many mutually- independent commitments. Thus, you may consciously purchase a risky investment – one that indeed has a significant possibility of causing loss or injury – if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities. Most venture capitalists employ this strategy.”

“Optionality” is related to the career advise given by Jim Collins. Instead of simply cataloging your skills, and applying for high-paying jobs in which those skills are required, Collins recommended first looking at (a) what you love, (b) what you can be great at, and (c) what you can make money doing. The goal isn’t to aim for some perfect job sometime later in your life, but to set yourself up in an area where you enjoy practicing and you adaptable for those opportunities that appear.


Implications for Education

Optionality is an investment choice that has a small potential downside but large potential upside. You don’t need a strict plan, lots of foresight, or even great environmental awareness to look for investment choices that have optionality. You simply need to keep from making bad decisions, and need to tolerate “getting it wrong” (which means simply starting over).

So what does this mean for education?

Student loans are an anti-optionality catastrophe.

Student loans are impossible to get rid of in bankruptcy. They also require a lot of foresight and planning — and worst of all, require it of 18 year old idiots (that is, virtually all 18 year olds).

Being an idiot isn’t a bad thing — if you have optionality, you try, fail, and learn from experience. But being an idiot with debt is a horrible fate.

At the very least, non-bankruptable student loans should never be offered for non-Science/Technology/Engineering/Mathematics majors. To force someone with no work history to take ten thousand, twenty thousand, or more in non-forgivable debt for a worthless English literature degree is horrid. It is the closest thing to “usury” that exists in our world outside of organized crime.

Not only do non-bankruptable student loans kill optionality by making education have a big potential downside, they make that downside more likely. Student loans for non-STEM majors encourage failure by getting students to loan up to enter a ghetto of low wages and few jobs. This is the opposite of encouraging wise investments.

We need to close the on-ramp to the ghetto by discouraging youth from making choices that don’t have optionality. We need to end non-STEM student loans.


It’s better for an 18 year old to be a drug dealer or go-go-dancer than to take non-bankruptable loans to study sociology. Those options may have optionality. Sociology doesn’t.