I have written about the role of competition and salience before. I argued that the presence of stiff competition can mean that the option is at least priced correctly, if not overpriced. It’s a matter of looking at how skewed the demand-supply distribution is. If demand is much higher than supply (stiff competition), it’s highly likely that the option is priced appropriately or overpriced. I’m talking about real-world options here.
On the other hand, if supply exceeds demand, the situation is ripe for underpriced or “cheap” options. This means that you would know beforehand that there’s a good chance that the ROI is positive. In the case with overpriced options, there is no clear indication beforehand that it’s rational to enter the transaction at all (but salient options with high payoffs will tend to draw hordes of competitors).
I was going through Ben Casnocha’s archives when I read this:
The main thing I’ve learned in my seven years studying and doing presentations is that the standard for presentations / public speaking in the professional world is low, and as such it’s easy to be seen as great. When most people suck at something, all you have to do is suck less. And when I discovered I had a natural knack for communication, I identified speaking / communicating / presenting as one of my natural strengths that, if built upon, could become an unstoppable strength thanks not only to my own capabilities but because of how I would be perceived relative to the masses.
Since public speaking is supposed to be one of the top feared things amongst the population, there is little competition to speak of (relative to less feared things). And since this fear keeps the average quality low, a small edge can be positively leveraged easily.
In competitive environments, a small loss of edge will mean leverage in the opposite direction - being tossed out of the pool. Here, a small edge means an increase in positive leverage.
For me this is exciting because I’m always on the lookout for investing in “cheap” options. I now have a criterion that I can use to ferret out such opportunities. Keeping an eye out for things that people fear.
Of course, it’s very likely that I will initially fear the same things, but if the worst-case scenario is clipped, I will invest in training to overcome the fear. Because I know that I will only have to improve by a little to gain a positively leveraged edge that will cost very little to acquire.
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