Dear Economist

Options

Dear Economist,

My best friend – single, male, Jewish, six-figure earner – has been interviewing like mad in order to escape a hellhole called Detroit. He has only had one job offer, albeit an excellent one (40 per cent salary increase) in LA. Thoroughly frustrated by the dating scene in Motown, he has decided to move.

I think he is being too hasty.

His final destination is surely New York, where the availability of dateable Jewish women is far greater. I am concerned that he won’t be employable if he decides after a year that LA isn’t really for him (it won’t be).

He’s an intelligent person with desirable skills so I have no doubt that he will be able to secure a comparable job in NYC. It only takes time.

How do I convince him that he’s making a mistake?

John, via e-mail

Dear John,

There is something in what you say. Real option theory states that you shouldn’t naively take the first option with a positive net present value. Better options may come along later, and taking the first option will preclude them.

Your friend must not exercise his option too soon.

However, the foundations of this theory need to be questioned. It assumes that the first choice really is irreversible, and that inaction would keep options open. But is it true that moving to LA will cut off a later move to New York? Even if so, is time in Detroit really keeping open the window of opportunity, rather than spreading a stain on the resume? I am not so sure.

Most important, even real option theory admits that you should take the first offer if it is good enough. A 40 per cent raise is plenty. Are you trying to keep the dateable women for yourself?

First published at ft.com.

7th of April, 2007Dear Economist • Comments off