While I was in the process of applying to graduate school, I had the opportunity to talk to a UCLA Business School faculty, Eduardo Schwartz, whose some of his main work was in something called "real options".

A real call option, like the name implies, is the right but not the obligation to make a certain decision in real life. For example, a real option could be whether to attend or not to Law School. But here is the conundrum: what is the the monetary cost in going to Law School? Of course there are a couple numbers than can be derived quickly, such as the actual tuition cost, the additional living expenses, the financial loss due to no or little work for the duration of the studies, etc.

But what about the cost of not having followed being a dancer, which was your childhood passion? What about the cost of delaying having children, or marrying for another three years? How can this be valuated? It certainly has a value, given that people would consciously delay or abandon certain opportunities in exchange for a monetary value- but what is this value? Well, it’s different for every person, and even then it is very hard to determine what the correct amount is. However, the main point is that there is a financial gain or loss every time we chose from a variety of options- every time we make a decision.

Now, in line with Schwartz’s thoughts, I started to think about emotional hedging (1). What if I wanted to hedge real life- emotional- risks by going long on such risk? In other words, I could bet that an undesired situation will happen, so that if it does a financial compensation equivalent to my emotional loss will be provided. For example, during the last Football World Cup, Argentina lost to Germany 0-4 (this was a very painful game to watch). In this situation I could have been a patriot and make a bet that Argentina would win. If my bet comes true, I will be emotionally satisfied, and in addition I would receive a sum of cash (the bets for that game were 1.65 to 1 for Argentina). Conversely, if I lost, my misery would double as well.

A second strategy would be to bet on Germany winning. In this scenario, if Argentina wins, I’m happy enough that I don’t mind the economic loss- and this is key- because my bet was low enough to not bother me enough to ruin the glory of the win. If Argentina looses, I will be given a financial compensation- again the key point- high enough for me to drink or buy enough ice-cream to drown my sorrows. All we would have to do is pick the right prices, and we could prevent the kind of mood swings caused by things beyond our control.

Maybe someone should device a startup which allows people to hedge emotions, and helps them decide the right amount to bet based on what other people have done. Of course whoever founded such startup would have to figure out how to price the bets.

(1)I might not be the first one to come up with this, and I haven’t look around to see if anyone else has been working on this topic.