I find it very funny that even well educated people are so ignorant of options and their implications. For example, a purchase is essentially an option that Indians often confuse with futures/forwards. A future/ forward is a binding agreement to execute a transaction in future. Whereas, an option is only an option to execute a transaction in future. An option holder has no “obligation” to execute the transaction in future.
Why is a purchase decision an option and not a forward/ future? And why exactly Indians confuse buying with forwards?
A buying decision is essentially a complex mathematical calculation based on calculation of cost of purchase and expected return. Cost of purchase is often straightforward but expected return is a mathematical nightmare. Expected return includes two variables and is defined as probability of the event multiplied by value of event. Here, both of the variables are highly subjective and indeterminate. Value of event is absolutely subjective. Of course, some mathematical calculation is possible for probability of event but its essentially indeterminate.
The problem with Indians is that they always forget that “probability of event” is an option. Indians somehow tend to think that whatever they have bought must be utilized to maximum. Historical deprivation maybe an explanation but I am not sure. The point I make here is that this probability essentially is an option, which you can exercise as per your convenience. It’s not a forward contract that you have to execute. That’s what Indians fail to understand.
Let me give examples. If a take house closer to office (costlier) instead of farther away, what am I buying? I am buying and option and not an obligation to save time when I travel to office. Does that mean I must travel to office every day because I have already “bought” time. Absolutely no. That’s foolish.
If I buy 5 different bikes what am I essentially buying? I am buying option to travel in my favorite bike when I feel like. Does that mean I must travel in every bike every day? What is weather is bad? That’s risky and of foolish.
What if join a gym? Must I go every day because I have already bought? Must I eat food everyday completely and finished every grain everyday just because it’s cooked?
But Indians just don’t get it. They want to get every penny out of their purchase. They have been deprived of things for so long that they have no concept of options. For them “wastage” is a sin. Even non-exercise of an option is a sin. If you buy an expensive shirt you must wear it every day. It’s not a choice. Its dictated by your purchase decision. Because, if you are not wearing it every day you are wasting!!! Only Gods knows when basics of Indians will be fully met so they can rise above all this.
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