This one has been long overdue. I
thought of writing this article after I had my finance and economics classes at
Purdue. While hanging out with a friend in the common area at school, we
extended some of the concepts we learnt in these classes to a different area, human
behavior and relationships. It’s amazing how closely some business concepts support
human interactions. Sometimes we might have gone overboard while trying to fit
in things, but nonetheless, it was fun!!
Probably the most important
concept in finance is the Net Present Value or NPV. It is the present value of
future cash flows. Many important decisions and deals depend on this NPV. We observed
that human interactions are greatly influenced by this concept. Every person has an
NPV and this changes depending on the other person involved. But here the
present value is not of actual cash flows (maybe sometimes it is) but of
something intangible; probably some favors or expected good times with the
person or something with an emotional value. The NPV of my best friend is far
greater for me than for someone who is just an acquaintance of his. For me this
NPV is based on all the reasons due to which the person is my best friend. The
NPV of smart students is high for others because of all the possible help which
they could expect, but for the smart students the NPV of the others is not as
much or sometimes negative because of the possible hindrance to their study
time… hahaha.
Sometimes we may not know a
person but still his or her NPV for you exists and can be significant. Take for
example, all applicants for a job you have applied for. Most certainly all have
a negative NPV for each other since one getting a job means no future cash
flows, literally. I have observed changes in people’s behavior towards each
other from ‘my dear friend’ to ‘do I know you?’ within a span of few weeks. It’s
all got to do with how valuable or important the person is going to be; which
is basically NPV.
Now let us extend this concept to
incorporate Options. When you are dating someone, the persons NPV is quite high
for you since there is a potential of a long term (hopefully lifelong)
partnership. However, like in any big project, we make sure that we have a
chance to exercise an option of backing out of this partnership if you see the
NPV going negative once more information about the project is available. Thus,
engagement is the time when each party gets the right, with no obligations to
exercise the option in either way; stay (marry) or back out.
Having said all this, we know how
unpredictable human behavior is. In so many situations we end up doing things
that a rational mind would not think of doing. This is where the above concepts
fall apart. Maybe this is where the concepts of speculation, risk/return
tradeoff can be brought into picture. But I won’t delve into those now. I am
done with my MBA and leave it to current management students who have some free
time to spend in the common rooms J
