Based on the ideas of Nassim Taleb expounded in Antifragility, explores viewing everyday decisions through the lens of call options. Specifically, the potential benefit of decisions with convex payoff and detriment of decisions with convex harm are discussed.

1. Options
Andrew B. Martin
IENG 6918
1

2. Definition: Option
• An alternative which puts one in a
position where most unexpected
events can do limited harm and
some unexpected events can
provide potentially unlimited
benefit.
2

3. Outline
• Characterization and definition
• Examples
• Implications
• Summary
3

4. Example: Party - Option
• “Drop by if you are around”
• Something better comes up we can
take advantage of it
• Something unexpected and bad
happens all we stand to lose is our night
4

5. Example: Party - not an Option
• “Are you going to be there?”
• Something better comes up, we can
take advantage of it but suffer damage
• Something unexpected and bad occurs
I lose my night and then some
5

6. Definition: Unbounded
• Y = x2 is unbounded above. Y goes to
infinity as x goes to +/- infinity. It is also
bounded below as Y can never be less
than 0.
6

7. Extending Unboundedness
• Y: outcome; x: conditions
• Unbounded gain: by choosing some
possible conditions we can make the
outcome as good as we can imagine.
• Bounded loss: regardless of conditions
the outcome cannot exceed a known
magnitude.
7

8. An option puts you in a
position where your potential
gains are unbounded and your
potential losses are bounded.
8

9. Example: Rent Controlled
Apartments
• Rent can only increase so much
• Housing Market Grows: my rent only
increases by known amount
• Housing Market Collapses: I can look
for a better, now cheaper, apartment
9

10. Example: Rent Controlled
Apartments
• I am insulated from potentially harmful
unexpected events.
• I can take advantage of some other
unexpected events.
10

11. Definition: Obligation
• A decision alternative that has bounded
potential gains and unbounded potential
losses.
• The opposite of an option.
11

12. Example: Getting into Debt
• Bounded gain: accomplishing the
purpose that motivated taking out a
loan.
• Unbounded loss: unquantifiable
potential damage can be inflicted on
you in having keep up with debt
payments.
12

13. An option puts you in a
position where some
unexpected events can benefit
you, and most other
unexpected events can only
do limited harm.
13

14. The Role of the Unexpected
• Unexpected events have a
disproportionate impact on our lives
• Consider stock market crashes
• These events have the potential to
inflict irrecoverable damage
14

15. We choose alternatives that
are options because we do
not want to be irrecoverably
damaged by unexpected
events, and, on occasion, we
want to benefit from them.
15

16. Where do we find these
options?
• We must actively hunt them out!
• Recall Dr. Barzilai’s Dutch friend’s son.
• We need to know the qualities options
possess so we can construct them.
16

17. Summary Page 1/3
• Options are alternatives that put us in a
position where our potential gains are
unbounded and our potential losses are
bounded.
• Another way to look at this is to say they
place us to take advantage of some
unexpected events, and such that most
others can only do us limited harm.
17

18. Summary Page 2/3
• Unexpected events can be much more
harmful than those we expect.
Choosing options insulates us from
getting irrecoverably damaged.
• That is, suffering a loss so devastating it
compromises the range of decisions we
have to consider in the future.
18

19. Summary Page 3/3
• We must look for options!
• They will not always be apparent.
19

20. Cheers
20