Optionality & Tails

How Netflix, Amazon, and Comedians Earn Despite Their Failure.

 
Optionality is the free will, not obligation, to choose from two or more choices. With optionality, the idea is to have more options with low cost, but unlimited upside.

Morgan Housel, in his book The Psychology of Money, mentions Tail Events which have a strong correlation to optionality. He presents the example of Walt Disney who had produced several hundred hours of film across multiple projects by the mid-1930s. Almost all were losing money until changed everything. The $8 million it earned in the first six months of 1938 was an order of magnitude higher than anything the studio earned previously. Disney kept trying new things despite the fact that he knew almost all of them would fail; he only needed to succeed one, though, to make up for all of his other losses. That’s Tail Events, the highly profitable, huge, or influential outcomes from a series of failed attempts.

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