Daily Archives: March 26, 2014

Getting married seen as a call option (finance)

I am currently following in Coursera the course on “Financial Markets” given by professor Robert Shiller. When the course finishes I may write about the experience and main takeaways from the course. Today, I only wanted to share an anecdote from last week’s lectures on futures markets and options.

At some point of the lecture the explanation from the professor went on as follows: 

[options] They occur naturally in life. I remember Avinash Dixit was writing about options and he said “when you’re dating someone and you know the person will marry you. You have an option which you can exercise at anytime by agreeing to marry.” Now, one of theorems in option theories is you usually don’t want to exercise a call option early. And so Dixit would say, well, maybe that that’s why a lot of people have trouble getting married. [LAUGH] You know why, they don’t want to exercise their option early

What we’ll see is that options have option value. They give you a choice, and so there’s something there. When you exercise an option, that means when you actually buy the thing (or in the case of a put, sell the thing), then you’re losing the  choice. So you’ve given up something. Of course you also have to exercise eventually if things are going to, to make sense.

[text excerpt from Coursera]

The reason of sharing the anecdote is to point at the humor and the kind of connections that these minds (such as Dixit and Shiller) are able to make. If only for that, I would recommend to always keep searching for such opportunities for continuous learning (be it from this type of courses, reading academic papers, books, interviews, etc.)

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