CFI Blog

Real Options Are Fine, Thanks

“A wise man makes his own decisions, an ignorant man follows the public opinion.”
-Chinese proverb

I’m part of a finance bloggers/writers/whatnot group in the DFW area which is tied to the national financial bloggers conference, FINCON, put on by the very generous and super nice guy Philip Taylor. Adam Baker of Man vs. Debt gave us each a copy of the movie that he had produced as part of a Kickstarter project and mission from the heart, I’m Fine, Thanks.

As my wife will attest, I am not a movie person. I might get roped into a movie a month with her, but that’s about it. It’s not that I dislike movies; it’s just that somehow, they never come up high enough on the priority list of things that I want to do for me to pick one and watch it. Instead, the Netflix queue just gets longer and longer and longer.

However, Fates conspired to have me watch the movie one Friday evening. Our dog had swallowed a pork spare rib bone whole (which, now I realize, is a pretty severe no-no), and my wife’s godmother had already purchased tickets to the premiere of the Fort Worth Rodeo, which is a pretty big event. I volunteered to do the dog watching vigil so that my wife could go to the rodeo with her family. Furthermore, I’d e-mailed Joan, the Man vs. Debt community manager a couple of weeks back because I’d included Baker’s awesome article about burning all of your crap in a bonfire in my Ultimate Guide to Personal Finance and in e-mailing her had mentioned that Baker had shipped some copies of the movie to the FINCON DFW group, creating, in my mind, a moral obligation to actually watch the movie.

Thus trapped in a web of my own commitments, I popped in the movie and began to watch. It’s mildly reminiscent of documentaries I saw in the Virginia Film Festival, but it’s also sort of like watching a blooming Morgan Spurlock in Grant Peelle. The main crux of the movie is that Peelle was stuck in a dead-end life. It’s not the life that you might envision as the normal dead-end life, some drifter going from street corner to street corner, living under a different bridge every night, but, rather, a dead end life where he’d made the decisions he thought he was supposed to make and found himself locked into one path. I’m pretty sure almost all of us have had those feelings before. David Byrne of Talking Heads summed up the questions very well.

You may find yourself behind the wheel of a large automobile
You may find yourself in a beautiful house with a beautiful wife
You may ask yourself, well, how did I get here?

You may ask yourself, what is that beautiful house?
You may ask yourself, where does that highway lead to?
You may ask yourself, am I right, am I wrong?
You may say to yourself, my god, what have I done?

Just in case you need a little earworm fix, here’s a musical interlude, and a dance break. If you watch the video, you’ll understand what I mean.

Peelle asks the question that many people ask at some point but few have the bravery to address, and fewer still have the fortitude to take action on if they don’t like the answer.

What if I do what I’m supposed to, go to college, get the good job, get married, have 2.5 kids, and the big house with the white picket fence in the nice neighborhood, and, after all that, I’m not happy?

Not Happy

Most of us would rather sweep that question under the rug and pretend it didn’t exist. It’s easier to tell ourselves that, of course better days are coming, because, after all, you’re doing what you’re supposed to be doing. Nobody would want to go down this path if it wasn’t great. Therefore, the end of the tunnel must be near, and when we come out the other side, there are unicorns and rainbows and monkeys in bacon tuxedos waiting for us to help us celebrate.

It’s the myth that we’re supposed to work until we get to some predetermined point – that we probably haven’t chosen ourselves – then, we can retire and do what we really want to do. The reality is that by the time we get to that point, we’ve failed to nurture that spirit and passion within ourselves, so instead of retiring to something, we’re retiring from something.

Yet, somewhere along the way, we catch ourselves – probably as we’re sitting in some commute or in some long-winded staff meeting listening to someone gripe because the Power Point slides weren’t done in the proper corporate issued template – wondering if this was really the path we meant to go down, what the selves in alternate universes are doing right now, and if those alternate selves ask the same questions that we do.

But, those questions rapidly go back under the rug as we remind ourselves of our duties and obligations and everything else that we must do.

I’m not saying that we’re not happy. Some are, and some are miserable, and a lot are in between, but oftentimes, when asked the meta-question “this is your life; is this what you want it to be?” they can’t just blurt out instinctively, from the heart, “hell yeah!”

It’s more like disappointment, the “this is it?” type of nearly rhetorical question you’d ask yourself when the toy in the Cracker Jack box turned out to be a zonk, or the movie you’d waited in line forty five minutes and paid $12 to see turned out to be a dud.

Yet, the moment that you start to contemplate change, a nervous cauldron starts slowly burbling up deep from within you.

“CHAAAANGE???!?!” Monkey Brain yells with the same shriek of panic that the cockroaches in the old television commercial would yell “Raid?!?!”

You immediately come up with as many reasons as you can think of to justify why the cost of the change is way more and much more painful than the current existence you have, even though you’re wondering if that really is it?

I’ve been through this scenario too.

There’s an old adage in the Army that your best job is when you’re a platoon leader, and they all go downhill from there. While I didn’t stick around long enough to see if that was truly the case throughout my entire career, I can certainly say that I wasn’t a huge fan of doing head counting or writing operations orders, and I probably wouldn’t have been terribly thrilled at being a staff weenie for most of the remainder of my time in the military. I had a great time being in a tank.

When I looked at what career options lay ahead of me in the military, though, there weren’t many opportunities to be in a tank after being a platoon leader and company executive officer. Company command, and if I was good lucky, a battalion commander. For the rest of it, hello Mr. Desk.

The five years in the Army was the price I paid for going to West Point. I’m glad I did it, but I could already see the “is this it?” for the remaining fifteen years it would take to get to a military retirement. During my time in the Army, I did latch onto one idea that I kept saying to myself “this is what I want to do.” I’d seen soldiers getting screwed (am I allowed to say that on my own blog?) by bad financial products (see “Chart Porn and Personal Finance” for that story), and I figured that there had to be a better way for people to get advice than from high commission (see “The Cost of Fees in Your Investments” for more) salespeople who were more concerned about lining their own pockets (see “Why is Fiduciary Duty Paramount?” for more). I also knew that I had neither the knowledge or the credibility to become a financial planner at that point, so I went to graduate school.

Go to Graduate School.

Since I didn’t pay for graduate school in cash (bad financial planner!), I wound up with a ton of student loan debt after getting my MBA, so I went for the highest-paying, easiest-to-land job I could and wound up at Capital One.

Did I mention that I hated flying a desk?

There was clearly a misalignment between me and Capital One. The culture reminded me of the Army – bureaucratic and political. Furthermore, there I was, full of vim and vigor about hating debt – as, by then, I’d already had my most mortifying money moment – working for a company who profited off of people getting into and staying in debt. That’s not to say that I don’t think that there’s a place in the world for credit cards, as there is, if you can use them responsibly, but my heart wasn’t particularly into it, and, frankly, it showed in my (lack of) results.

I’d followed the money rather than following my passions, much as many of the people whose stories were told in the movie. Quite early on in my relatively brief stint with Capital One, I was already asking myself whether this was the life I wanted to lead. The money was good, but was it worth sacrificing everything else and being generally unhappy with my situation?

As soon as it was financially feasible, we parted ways. I felt like I wanted to control my destiny and be my own boss, and there was still the desire to be a financial planner, to help others out, but I still felt like I wasn’t there yet. Who would want to take advice from someone who’d only managed to pay off his graduate school loans? I felt like my credibility was lacking.

With a couple of Hash House Harriers friends, we started up a little software development consultancy. It scratched the entrepreneurship itch, was a lot of hard work, and finally got some traction and began to grow and to attract suitors. For about five years, it was really immersive for me, and took a lot of energy and drive and reaped the rewards of the hard work. But, slowly, the same doubts that I’d previously had started to creep back in. Was this really what I wanted to do for the next decade or two? I was in a great position. I could leverage relatively little work to make the company go and grow in a nice, slow, steady manner, but I also felt like I was wasting time. There wasn’t meaning to what I was doing. It was a pathway to where I wanted to go, but it wasn’t the end destination, like it was, probably, for others in the team. I needed to get out.

Fortunately, we were able to engineer a sale, which not only was financially remunerative, but also created a great and credible story if I wanted to be a financial planner – I had built, grown, and sold a company. If I was a business owner looking for financial advice, I’d much rather take that advice from someone who’s been in my shoes and got to the end of the tunnel than from someone who’s smiling and dialing at a phone all day long hoping to hit the lottery of finding the sucker with $200 million who doesn’t know how to invest it and will pay fees and commissions all day long.

Let me jump ahead into the future. My vision of my life in the future is not being a financial planner forever (GASP!). I want to travel the world. I want to live in new places, learn new languages, and experience new cultures. Being stationed in Germany and traveling all of the time implanted that bug deep inside my head and I cannot get rid of it. That’s where my road leads. That’s the “so what” of what I do.

But, I’m not there yet. There are a few reasons why I can’t just up sticks and travel. Therefore, why not follow the other passion, the one that’s intrigued me for nearly two decades?

At each step along the way, I made choices which either limited my future choices or increased my future choices to get to the point where I am today. It wasn’t until I started realizing that my choices were limiting my options that I began to grasp what I needed to do and to begin removing constraints.

I reached a point in my life where I, not knowing what they were called at the time, began to give myself real options.

Real Options in Your Life

What are real options?

Have you ever had to make a decision when you were faced with incomplete information? Should I replace the battery or buy a different car? Buy that long-term care insurance policy? Try out that new restaurant? Take the job offer or wait to see if a better one comes along?

In many of life’s situations, we’re faced with making a decision when we don’t really know which of the paths is best for us.

What if, though, we could delay the decision into the future and try to gather up more information about our choices so that, in the future, when we had to make the decision, we had a better idea of what the right decision would be?

That, Dear Reader, is what is called a real option. Real options have their own value. If you’re a true math nerd and want to go deep into how to value a real option, you can check out a paper by M.I.T.’s Shuichi Masunaga on the different ways to value them.

The most common real option is to defer a decision. Should you go to graduate school to try to advance your career? Can’t make up your mind? Wait another year and decide then. That deferral, though, creates uncertainty in your life. For the next year, you don’t know what you’re going to do with the rest of your life, or at least, the next step in your life. Career? School? Play the guitar in the park and hope people drop coins in your case? Who knows?

Through some of the use of real options, you’re introducing uncertainty, which Monkey Brain hates.

Why does Monkey Brain hate real options?

The biggest reasons that Monkey Brain hates real options are fear and uncertainty. Monkey Brain wants tomorrow to look like today and for today to look like yesterday. The more normal and routine life is, the better. Any time there is uncertainty in our brain, it lights up the lateral interparietal area of our brain, as the University of Rochester’s David Knill shows.

This uncertainty is not good for you. As the University of Toronto’s Jacob Hirsh and Michael Inzlicht show, uncertainty causes stress in the mind, particularly for people who tend to be more neurotic than others. Most people would rather receive clear negative feedback than face an uncertain future, even if the uncertain future might wind up leading to a positive outcome. Monkey Brain values certainty over positivity. He would rather lead you down the road to perdition than wander off the trail to good.

Another negative about real options for Monkey Brain is that it forces you to make a decision. In a sense, a real option is good for Monkey Brain because he doesn’t have to make that decision right away. He can let Future You make the decision, and, if Monkey Brain is lucky, that decision will get deferred indefinitely. However, because of the Zeigarnik Effect, that decision will rattle around in the back of your brain until you can come to a final conclusion about it. I can personally attest to the powers of the Zeigarnik Effect in my long and winding journey to becoming a financial planner!

Furthermore, Monkey Brain likes to think that he can control the future, regardless of how much control he actually has over the outcome. As Julius Rotter explains, the control that we feel we can exert on the future affects how we interpret events. This is called the locus of control. If something good happens to us, then Monkey Brain said that we did it – an internal locus of control. If something bad happens, then Monkey Brain likes to blame everything else but himself – an external locus of control.

When you introduce real options into your life, then, in a sense, you’re introducing more external elements which could change what happens to you.

YOU: “Let’s hold off on this and see if we can make a more informed decision later.”


Despite what Monkey Brain tells you, though, there are times when you want real options.

Why are real options good for us?

To me, the real reason that real options are good for us is that they don’t create constraints in our lives artificially early. Let me explain.

How often do you hear the narrative that you should graduate from high school and go off to college to get your education so that you can get a job in the real world and make something of yourself? (for more on my thoughts on this, you can subscribe to my 52 week personal finance game plan, where part of the package is the article “The Financial Decision Most 18 Year Olds Aren’t Prepared to Make”).

So, you go off to college, get the requisite student loans, and you graduate. Now, you have a commitment to good old Sallie Mae to pay those suckers back, and they’re not bankruptable, so until they’re paid off, you have an anchor around your wallet. Because you have to make a certain amount of money to both fund your life as well as pay back Sallie Mae, you’ve reduced the number of possibilities you can pursue in your career, because you’ve increased your salary requirements to account for Sallie Mae.

Later, you buy a house. You can’t afford to pay for it in cash, so you get a mortgage. Now, you have another mandatory expense in your life – particularly if you have a recourse mortgage – which limits your ability to change jobs, move, or take a sabbatical. Several of the people whom Peelle interviewed were in this exact situation. Saddled with a mortgage (but, hey, you get a tax deduction on that mortgage, right? Maybe not…), many people wanted to make a change but couldn’t because they faced foreclosure or a short sale if they made a change that didn’t pay the house bill.

Life is full of these types of decisions, which we make at the time thinking that it’s what we’re expected to do and supposed to do (the theme of I’m Fine, Thanks), but we don’t think about the implications of what a decision now does in terms of removing our ability to be flexible later on in life.

For some people, that flexibility is not important, but for others, it’s critically so. As the interviewees in the movie tell their tales, they didn’t think that flexibility was important in their lives, but, when the time came where they wanted to make decisions and changes, they found out that flexibility was important in their lives.

I felt that way when I’d run up credit card debt. I made decisions to finance my life at the time through the (irresponsible) use of credit, and, later, when the time came to pay the piper, I had to limit other things in my life to take care of the credit card debt. My decisions at the time I whipped out the credit card prevented me from doing something that I wanted to do later, such as work for the WWE.

Furthermore, we’re not great at predicting what our future selves might want. While we base what we think we’ll want in the future on what we know now, we may find out more information later which changes what that decision would have been. When I was at West Point, I thought I wanted to be an Army officer for my career. Once I got into the Army, I pretty quickly changed my mind, since I actually had information, experience, and knowledge about what the Army was all about, and it didn’t fit with what I wanted to do with my life.

But what about money?

Throughout the movie, I caught myself wondering this question, as did most of the people who were interviewed. The cliché of “do what you love and the money will follow” may sound nice, but when the money doesn’t follow, you’re in trouble. The brutal reality is that you still have to make money; just following your passion may ensure you’re a starving artist.

I can also tell you from personal experience, which mirrored the stories of all of the people interviewed in the movie, that chasing money for money’s sake is an empty experience in life.

Thus, there needs to be a balance. You need a certain amount of money to both fund your current expenses and to make sure that the cabinet is not threadbare and empty in the future when you can no longer work. However, as my stressed out investment banking friends like to tell me, working crazy hours in a career just for the money will suck the soul right out of you. Chasing money for money’s sake will not lead to a rich life.

You have to have a vision beyond the money. It was what drove me for years to do what I’m doing and for where I want to be in the future. Money is part of it. To stick your fingers in your ears and say “na na na na” when the money discussion comes up is merely naïve and ignorant. But, you have to have something beyond solving your money problems in leading you towards a rich life. It’s important to create a plan where you integrate passion with money.

Let’s take Peelle’s movie as an example. It didn’t look particularly polished, but he’ll learn his craft and he’ll get better. The next one will look a little more polished than the first, and so forth.

Having the passion in what you do makes it easier to work the crazy hours. Peelle looked like he hadn’t slept in three months in making that movie, but passion (and Starbucks) fuelled him. I used to have to write proposals on the weekends in my old company. It sucked. Yet, I got up at 6 AM on a Saturday morning to write about the link between credit cards and drug addiction because it was something I was really excited to explore and to write about.

You might not be able to start on that plan today, but that’s OK. It’s important to commit to having that plan and to start to take action on it.

Here are some important things to think about when it comes to what you really want to do with your life and how real options can get you there:

  • Know what’s a true priority in your life. It’s one thing to ask yourself if this is truly what you hoped it would be when you examine your life, but it’s an entirely different thing to then turn that questioning into a plan for where you really want to go. Evaluating and understanding your priorities in life will help you to gain clarity in where you want to go and provide you an end goal to start working towards.
  • Work to eliminate the constraints which reduce your real options. There is value in flexibility, so start to remove things which eliminate your flexibility. Pay down your debt. Sell your crap. Research from the University of Chicago’s Mihaly Csikszentmihalyi shows you’re made happier by experiences than by possessions, so why burden yourself down with something which doesn’t make you happy in the first place?
  • Work to increase your real options. I wish there were another way, but the best way I can think of is to have a strong personal balance sheet. Eliminate your debt and then save and invest as much as you can. Think about starting a side gig. The more money you have in the bank, the easier it is for you to make the choices you want to make because you eliminate money as a constraint. Alternatively, think of options in the future which you can achieve with less money. Want to retire earlier? Think about cheaper places to live or living on less when you retire. There are always options if you’re willing to accept other tradeoffs.

Real options are important in our lives because they provide us with flexibility both now and in the future. We aren’t hemmed in by our decisions and forced to go down a path that doesn’t provide us with the happiness and meaning that we sought in life. Understanding how real options play into our lives and how decisions we make now may constrain our real options in the future will help us to make choices which are wise and intentional.

By the way, my dog is fine, thanks.

Author Profile

John Davis
John Davis is a nationally recognized expert on credit reporting, credit scoring, and identity theft. He has written four books about his expertise in the field and has been featured extensively in numerous media outlets such as The Wall Street Journal, The Washington Post, CNN, CBS News, CNBC, Fox Business, and many more. With over 20 years of experience helping consumers understand their credit and identity protection rights, John is passionate about empowering people to take control of their finances. He works with financial institutions to develop consumer-friendly policies that promote financial literacy and responsible borrowing habits.

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