Option = Asymmetry + Rationality

Option = asymmetry + rationality

The rationality part lies in keeping what is good and ditching the bad, knowing to take the profits. Nature has a filter to keep the good baby and get rid of the bad. The difference between the antifragile and the fragile lies there. The fragile has no option. But the antifragile needs to select what’s best—the best option.

It is worth insisting that the most wonderful attribute of nature is the rationality with which it selects its options and picks the best for itself—thanks to the testing process involved in evolution. Unlike the researcher afraid of doing something different, it sees an option—the asymmetry—when there is one. So it ratchets up—biological systems get locked in a state that is better than the previous one, a path-dependent property. In trial and error, the rationality consists in not rejecting something that is markedly better than what you had before.

In business, people pay for the option when it is identified and mapped in a contract, so explicit options tend to be expensive to purchase, much like insurance contracts. They are often overhyped. But because of the domain dependence of our minds, we don’t recognize it in other places, where these options tend to remain underpriced or not priced at all.

I learned about the asymmetry of the option in class at the Wharton School, in the lecture on financial options that determined my career, and immediately realized that the professor did not himself see the implications. Simply, he did not understand nonlinearities and the fact that the optionality came from some asymmetry! Domain dependence: he missed it in places where the textbook did not point to the asymmetry—he understood optionality mathematically, but not really outside the equation. He did not think of trial and error as options. He did not think of model error as negative options. And, thirty years later, little has changed in the understanding of the asymmetries by many who, ironically, teach the subject of options.4

An option hides where we don’t want it to hide. I will repeat that options benefit from variability, but also from situations in which errors carry small costs. So these errors are like options—in the long run, happy errors bring gains, unhappy errors bring losses. That is exactly what Fat Tony was taking advantage of: certain models can have only unhappy errors, particularly derivatives models and other fragilizing situations.