Child options

The authors of some of the recent work on "happiness," appear to be perplexed by certain human actions, such as having children, that do not appear to increase happiness. Based on this, they hypothesize that humans are driven not to maximize happiness but other unknown and mysterious needs. This does not follow. This is the same problem that decision-makers in companies face when they forecast cash flows and discount them to calculate a Net Present Value (NPV). Often such NPV is counter-intuitive and many make up "unknown and mysterious" strategic value to justify their decisions. The reason is that, NPV or Net Present Happiness for that matter, cannot be calculated by discounting forecasted future streams.

For example, having children, give parents options – ability to make decisions as the future unfolds. In the agrarian societies of yesteryear, having children was akin to what corporate finance professionals currently do – children are like cash flows that can be discounted to the present as their services will be deployed in the field and the benefits of such services show low uncertainty. This is not the case anymore – benefits of children show high volatility but having children also provide parents flexibility. Children, thus, represent basket of options held by the parents – the value (in terms of happiness) can only be determined by options based analyses and not by deterministic calculations.

The perils of deterministic methodologies seem to be spreading to other areas as well – including psychology, policy and societal designs - in addition to corporate finance.