Business strategies come in two complementary flavours. The first is a blueprint charting the way forward in – what we might call – a best-case scenario. It has clarity, poise and some optimism to it. Not wildly unrealistic, but implicitly hopeful.
The other flavour (uninspiringly) assumes the worst. Think of it as a survival toolkit, a failsafe plan. This strategy addresses the question of what to do when the chips are down.
Together, these two form what looks and feels like a balanced approach. There’s something in it for investors at both ends of risk tolerance. If the plan is well baked, there might even be an attempt to reconcile both extremes with the magic of weighted averages.
Having different ways to forge ahead is an integral part of the strategy plan, and rightly so. It’s called risk diversification, and its purpose is to spread risk exposure across several possible outcomes.
But could there be unintended consequences to a failsafe strategy?
And does the quest for optionality impede strategic foresight?
The Other Extreme
It’s tempting to debate and deliberate over options at gratifying length. But let’s consider what happens when options do not abound, and one single, extreme possibility presents.
Thankfully, we have the benefit of hindsight through historical archives.
In 1519, Spanish Captain Hernán Cortés landed on the shores of the new world (Mexico) and famously ordered the destruction of the boats on which he and his unit arrived.
While the outcome of the ensuing battle was unknowable when Cortés gave the audacious order, here’s what we know to have resulted from his decision: Cortés and his men had no choice but to win the war or face annihilation. There could be no derisking, half measures or dithering. The only way to succeed in this all-or-nothing situation was through unwavering single-mindedness. It’s hard to understate the value of a shared vision at that moment. Anything less would reduce their chances of survival.
Cortés went on to conquer the occupying Aztec Empire in the two years that followed. A real historical masterpiece, complete with heroics, valour and absurdity. Yet still, it’s hard not to look beyond the entertainment value in this story and land on some real pressing questions.
In a space where optionality is highly regarded, how relevant are limits and constraints? Should we be putting options on the table or removing them entirely?
Finding Balance and Fit
Knowing how much optionality is good to embrace in any given setting can feel like a guessing game. At one end of the scale, singularity could either resemble blatant narrowmindedness or determined focus. And on the other end, options could foster indecision or lead to new opportunities. It’s a two-sided coin, regardless. The world of finance might offer some insight into how we balance these conflicting perspectives.
The thought premise for this Investopedia article titled How to Invest at Every Age is simple: your risk appetite should reduce with age. From this, we can distil something else. Responding to options is as much about weighing those options as it is understanding our capacity to reach for them. The investment landscape indeed offers opportunities at every risk level, but the suitability of an investment is informed, not only by its inherent attributes but by the circumstance and situation of the individual investor.
How we should respond to options is not revealed through a crystal ball or an oracle. Once we understand the options at hand, the blueprint for charting the way forward can be summed up in two words: Know thyself. This opens up a level of clarity that doesn’t necessarily make the decision right, but it releases decision-makers to own it confidently. And the best decisions are the ones you can own without second-guessing. Something about being able to lock it in carries tailwinds that help the decision achieve its intended goal.
There’s one lingering question. How about the forgone benefits when one decision is made over another? In other words, how do we justify the opportunity cost every time a decision is made?
Keeping Options On the Table
One way to approach this question is to explore the other extreme, where several options on the table are pursued. This implies spreading resources across several pursuits. Where resources are not limited, it’s hardly an issue. But alas, reality is different. Resources are limited, and (ideally) decisions are optimised to make the best use of them. The real risk to keeping options on the table is under-resourcing those options.
To better appreciate this, let’s consider a simple scenario of multitasking. Here the resource is time and attention, and options are the tasks competing for it. A BBC study found that multitasking makes us inefficient at best. I believe this lesson applies beyond multitasking. Spreading any resource thinly across several goals reduces your chances of succeeding at any one of them.
Summary
Decisions are crucially important. They present options, each with unique risks and promises.
It’s tempting to embrace the notion of a right decision, discovered through diligent analysis of the options at hand. The bid to make the right decision, however, comes with the risk of indecision. Even after making a decision, it’s easily second-guessed in light of new information.
The trick is to view the options through the lens of priorities and capacities. Doing this ensures well-anchored decisions. It also emboldens the pursuit of those decisions by providing the clarity and conviction needed to see them through.
