Juicy Bits: Mihir Desai on Optionality

Juicy Bits: Mihir Desai on Optionality

Juicy Bits are, well, just what the name implies. The juiciest bits of articles, books and podcasts that you’d want your future self to remember.

Here’s Harvard professor Mihir Desai on Optionality from his book  and the HBS article The Trouble With Optionality.

Maximizing optionality

I’ve lost count of the number of students who, when describing their career goals, talk about their desire to “maximize optionality.” They’re referring to financial instruments known as options that confer the right to do something rather than an obligation to do something. For this reason,  options have a “Heads I win, tails I don’t lose” character —what those in finance lovingly describe as a “nonlinear payoff structure.” When you hold an option and the world moves with you, you enjoy the benefits; when the world moves against you, you are shielded from the bad outcome since you are not obligated to do anything.  Optionality is the state of enjoying possibilities without being on the hook to do anything. 

Collecting cheap options as a career strategy

For new graduates, working at a consulting firm creates optionality because of the broad exposures (to industries and companies) and skills these firms purportedly develop. Going to graduate school creates optionality by enabling more opportunities than a narrow professional trajectory can provide. Working at prestigious firms and developing social networks are similarly viewed as enabling more choices and more optionality. And of course, the more optionality, the better.

How this backfires

This emphasis on creating optionality can backfire in surprising ways.  Instead of enabling young people to take on risks and make choices, acquiring options becomes habitual.  You can never create enough option value—and the longer you spend acquiring options, the harder it is to stop. The Yale undergraduate goes to work at McKinsey for two years, then comes to Harvard Business School, then graduates and goes to work Goldman Sachs and leaves after several years to work at Blackstone. Optionality abounds! This individual has merely acquired stamps of approval and has acquired safety net upon safety net. These safety nets don’t end up enabling big risk-taking—individuals just become habitual acquirers of safety nets.

Options require risk-taking

I am no longer surprised to see students who end up remaining in companies—usually consulting or investment banking firms—that were initially intended as way stations that would create more optionality on the path to their actual entrepreneurial, social, or political goals. They often end up saying to themselves, “Why not stay another year and create more options for down the road?”  The tool that was supposed to lead to more risk-taking ends up preventing it. 


Check out Mihir’s book, The Wisdom of Finance on Amazon

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Khe Hy
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Khe Hy is the creator of RadReads.