Guide to Decision Making: Getting it More Right than Wrong

Chapter 10

Risk a little, gain a lot: options thinking

“Good management is not just about making the right decisions. It is about making the right decision at the right time.”

Anon

THALES OF MILETUS, a Greek philosopher, read his tealeaves. He divined that the olive harvest would be bountiful. Next he bought the right (but not the obligation) to rent olive presses at normal rates come harvest time. The forecast was correct. Olive growers were desperate for pressing capacity. Thales made a fortune by subletting the olive presses for an extortionate sum, demonstrating just how good an investment an “option” can be.1

This chapter explores the role of options.2 Options can be a useful tool in preventing escalation and entrapment, with options theory working on the principle that small failures are preferable to large ones. Much has been said in this book about undue risk-taking and failure on a grand scale. Options, by contrast, are about taking affordable risks that help avoid damaging losses and may lead to substantial gains.

Falling forwards

An option is a toehold investment that confers the right but not the obligation to take action in the future. For example, the right to buy a quantity of oranges in three months’ time at 10 cents each. If, in three months’ time, oranges cost only 9 cents each, it makes no sense to exercise the option and the option holder loses the money paid for it. But if the price of has risen above 10 cents, the option is said to be “in the money” because ...