Back in 2008 during the start of the economic downturn. I was fresh out of MBA studies, working as a management consultant.
I’d studied options and derivatives in my second year. From this, I further became interested in “real options”, which provides ways to value real decisions under conditions of uncertainty.
Anyway, we (as in the firm I worked for) were trying to figure out what was going with the economy, what it meant, and how we could make money off of it advising customers. So, we had a few group ideation meetings, stuff like that.
At this point in time in September-ish 2008, volatility in many prices for many basic things, like fuel, even some food like milk, started noticeably increasing. Like, fuel prices would go up and down $1 in a week.
I noticed, people started delaying purchases until they absolutely had no more time to delay. Like, car sales dramatically dropped. Many people stopped buying cars. Because, of the tangible levels of uncertainty they were beginning to feel.
One day, a connection just clicked with me, that option valuation theory could be really useful to help explain and predict, what was happening in the economy.
As volatility increases, option value increases. In the real world, volatility manifests itself as uncertainty. On a microeconomic level, the volatility linked uncertainty gave consumers and businesses a more valuable real option of postponement.
On a macroeconomic level, the individual decisions of consumers and businesses to postpone spending, contributed to a death spiral for the overall economy.
I’m no economist. But, I put these ideas together in a deck, centered around a pitch for 3M company, showed it to some directors. They loved it, formed a team around it, continued developing it, pitched to 3M, and it helped to sell millions in project work.
Meanwhile, after I had made the connection, it was really hard to stop thinking about it. It ties together a lot of branches, old schools of economics (which, by the way, you will be flayed for questioning) with finance (has a lot of assumptions built in, which you will also be flayed for questioning) with human behavior.
Continuing to think about these connections, led me to quit my job at the consulting firm, after I had made a good name for myself.
Ultimately led me to become an entrepreneur, to build a company more closely aligned with writing real options, which is what I feel like I do, every time we give a quote at BOM Quote Manufacturing.