Life Is Long Gamma

Life Is Long Gamma

Indeed, in plain sight.

One day, my friend Anthony Glickman, a rabbi and Talmudic scholar turned option trader, then turned again rabbi and Talmudic scholar (so far), after one of these conversations about how this optionality applies to everything around us, perhaps after one of my tirades on Stoicism, calmly announced: “Life is long gamma.” (To repeat, in the jargon, “long” means “benefits from” and “short” “hurt by,” and “gamma” is a name for the nonlinearity of options, so “long gamma” means “benefits from volatility and variability.” Anthony even had as his mail address “@longgamma.com.”)

There is an ample academic literature trying to convince us that options are not rational to own because some options are overpriced, and they are deemed overpriced according to business school methods of computing risks that do not take into account the possibility of rare events. Further, researchers invoke something called the “long shot bias” or lottery effects by which people stretch themselves and overpay for these long shots in casinos and in gambling situations. These results, of course, are charlatanism dressed in the garb of science, with non–risk takers who, Triffat-style, when they want to think about risk, only think of casinos. As in other treatments of uncertainty by economists, these are marred with mistaking the randomness of life for the well-tractable one of the casinos, what I call the “ludic fallacy” (after ludes, which means “games” in Latin)—the mistake we saw made by the blackjack fellow of Chapter 7. In fact, criticizing all bets on rare events based on the fact that lottery tickets are overpriced is as foolish as criticizing all risk taking on grounds that casinos make money in the long run from gamblers, forgetting that we are here because of risk taking outside the casinos. Further, casino bets and lottery tickets also have a known maximum upside—in real life, the sky is often the limit, and the difference between the two cases can be significant.

Risk taking ain’t gambling, and optionality ain’t lottery tickets.

In addition, these arguments about “long shots” are ludicrously cherry-picked. If you list the businesses that have generated the most wealth in history, you would see that they all have optionality. There is unfortunately the optionality of people stealing options from others and from the taxpayer (as we will see in the ethical section in Book VII), such as CEOs of companies with upside and no downside to themselves. But the largest generators of wealth in America historically have been, first, real estate (investors have the option at the expense of the banks), and, second, technology (which relies almost completely on trial and error). Further, businesses with negative optionality (that is, the opposite of having optionality) such as banking have had a horrible performance through history: banks lose periodically every penny made in their history thanks to blowups.

But these are all dwarfed by the role of optionality in the two evolutions: natural and scientific-technological, the latter of which we will examine in Book IV.