Scouting talent as buying options

Why volatility and youth are signals of potential

See also my previous post on talent as leverage.

I.

Cal Newport wrote an interesting blog post aimed at high schoolers who want to get into selective colleges. He compares extracurricular activities like these:

• “A high school student who ran a web design company that involved the managing of a dozen contract employees and servicing 5-figure corporate contracts.”

• “A high school student who was the president of two student clubs and was a member of the varsity tennis team.”

Obviously, the former is far more impressive. The first kid sounds like a genius. The second kid just seems like a grind. But Newport points out that the later requires just as much hard work and dedication in terms of hours spent - possibly more. So what exactly is it that makes the former more noteworthy?

Another example:

• A 17 year old writes a blog post about Chinese industrial policy that gets featured on Marginal Revolution.

• A 25 year old writes a blog post about Chinese industrial policy that gets featured on Marginal Revolution.

These two budding bloggers have done the exact same thing. But the first one seems like he’s on his way to becoming a prominent public intellectual, and the second just sounds like an econ grad student with some extra time on his hands.

So what exactly is going on here? Why is there such a wide disparity in how these activities are perceived? Newport calls his explanation the failed simulation effect - if we find it hard to mentally simulate how a person could have completed a certain activity given their age, situation, and other factors, we find it much more impressive.

It’s not hard to figure out how a high school student becomes the president of a bunch of clubs or gets into the varsity tennis team. Go join a bunch of extracurriculars and give each of them 15+ hours a week of your time until you get promoted to president. But how does a high school student start a web design company or land five figure contracts? I guess it must be possible, but I honestly don’t know.

Same goes for the second example. How does a 25 year old econ grad student write a blog post about Chinese industrial policy? Well, he’s been learning about the relevant topics for at least the last 8 years. It would be shocking if he couldn’t write an insightful blog post about a subject in economics which got to choose. But how did the 16 year old do the same thing? I don’t know - I never met someone in my high school who was doing anything nearly as impressive.

What’s funny is that it requires more time (and misery) to become the president of three high school clubs than it does to read a few books about the Chinese economy and write an essay about them. But there’s still the mystery of how this kid avoided the mimetic rat race of traditional extracurriculars and dedicated himself to some niche academic topic. Again, it’s not about hard-work - it’s about novelty, ambition, and wonder.

II.

Here’s an alternative explanation of what is happening. Identifying potential is like buying a call option (the right to buy an asset at a predetermined price on a set date in the future). You buy this option by giving a promising young person mentorship, employment, connections, or capital. In exchange, you receive something if they become successful in the future - a superstar employee, a grateful protegee, a IPO on your seed investment, or simply the status and satisfaction of kickstarting the great things the person ends up doing.

If you view talent scouting as buying call options on people, you can understand many mysterious facts about the talent market.

Why are kids that do new and interesting things more impressive? An option is worth more if the underlying asset is more volatile - the option holder can make an arbitrarily large profit if the asset shoots to the moon, but if it goes to zero, he only loses what he paid for the option. Which means an option on the kid who started a successful business in high school is worth way more than one of the kid who grinded his way into “leadership” positions in clubs. The best case scenario for the first kid is that he becomes the next Patrick Collison - the best case scenario for the second is that he works for Patrick Collison. Investing in the first kid is like buying an option on Bitcoin, investing in the latter is like buying an option on IBM.

An option is worth less the closer you get to the date of maturity (the date on which the option can be exercised). Why? Because there’s less time left for the asset to experience large fluctuations in value. If you’re holding an option, you want these kinds of fluctuations - you’re entitled to the full upside but don’t have much to lose from the downside.

The time to maturity for talent depends heavily on what kind of talent you’re investing in. For an employee, it might be a year. For a startup founder, it might be a decade. But in either case, you have more to gain from investing in younger people. If a 20 year old really is as impressive as you suspect, then he will spend the next five years doing a bunch of cool things that get noticed by lots of people - and once that happens, the price of the option on him will increase. To invest in someone talented at age 20, you can give him a 10,000 dollar grant. To invest in the same person at age 25, you have to chip in half a million in his seed round.

And if you can buy an option on the 25 year old for the same price as you could before, then that’s a strong signal that he isn’t nearly as impressive as you thought. Which is why we don’t find the graduate student blogger nearly as impressive as the high school blogger. We take the latter’s early initiative and curiosity as an indication that he will be doing far more impressive things by the time he’s 25.

III.

So what does this all mean for young people who want to get noticed? The common mistake is to think that the value of the option on you increases the less you commit to anything. Suppose you want to create a startup someday. The average age of founders in YC is 30, so consider that the date of maturity on the option on you. The closer you get to this age, the less the option is worth, especially if you don’t have any track record of volatility in the past (i.e. cool shit you’ve done).

The takeaway is that time is working against you. Do something really creative and interesting as early as you can so that you can show people that you have potential (i.e. you’re high volatility). Then convert people’s willingness to buy options on you into connections, capital, and mentorship. Use these resources to do even more impressive things. Rinse and repeat.

As Nassim Taleb has a made a career of pointing out, options are hard to price. This why identifying talent is so hard and why doing it well can be so valuable.

Other applications of this theory:

• College internships allow you to buy an option on a student for less than it costs to hire her full time. The option costs 10-20 grand, and if you like her work, then you can make her a return offer.

• Parents want you to have a conservative lifestyle and traditional career because they hold the opposite of an option on you. They’re basically insuring you - they have to take care of you if you get addicted to drugs or go broke building a startup, but they don’t get to have fun at your parties or share in your billion dollar exit. It’s no surprise that parents from Asian cultures (where they are expected to insure their kids through their early twenties) are less tolerant of divergent and volatile life paths.

• Big tech companies have a lot to gain from some superstar employee who develop a product or feature that can be scaled to their billion users. So they hire a bunch of smart people and hope for the best. This is basically an option - if one of their hires builds something super-valuable, the company get to keep it. And the price they pay for this option is a very cushy salary which is higher than the value generated by the median employee.

• When colleges reject Asians for having bad personalities, I wonder if what they’re saying is, “We think these Asian kids are a low volatility asset. This hedge fund - sorry, our endowment - makes money mostly from alumni who become super-right tail successes, because they’re the ones who can afford to give multi-million dollar donations. So even if on average Asians are more impressive, we want to buy options on the higher volatility white kids.” To clarify, this is not my view, this is my hypothesis of their view.