Aristotle covered a wide range of topics in his work. Specifically, his work titled “Politics” comprises 8 chapters, each addressing various facets of society.
These include reflections on the thoughts of other philosophers, regimes, political theory, citizenry, constitutions, family, and education.
The concept of options contracts, as we know them today, was mentioned in relation to a mathematician and philosopher named Thales, who is now considered one of the first Greek philosophers.
Thales lived in Miletus, Greece, between the late 600s and mid 500s BC. At the time, it was one of Greece’s prominent and wealthiest cities.
It should be noted that there are older instances of contracts similar to options, such as those found in the code of the Babylonian king Hammurabi. In his famous Code, he outlined rules for farmers.
These rules were a lot like modern-day put options. However, Thales’ case mirrors the modern understanding of options contracts more closely.
This article will highlight how Thales’ olive bet influenced modern finance theories.
Aristotle’s Writings About Thales
The story recounted in “Politics” about Thales reveals that despite being wise, Thales lacked significant wealth. His city, Miletus, was known for its olive production.
During one particular winter, he foresaw a bountiful olive harvest in the upcoming season. With his limited resources, he made a strategic decision to buy the right to hire olive presses for next autumn. He made a cash deposit to the owners of the presses and patiently waited.
By the time the harvest came, Thales’ foresight had proved accurate as the olive yield surpassed expectations.
This meant that all Thales had to do was exercise his right to lease the presses and, in turn, sublease them to others at a substantial profit. He made a fortune from his prediction within a year.
Thales Olive Bet as an Early Form of Options Contract
In executing this plan, Thales had essentially pioneered the concept of the options contract. He bought a call option — a right but not an obligation — to use the olive presses.
This not only expanded his legacy beyond philosophy but also ventured into the domain of finance.
In the event of a poor olive crop harvest, there was a risk that there wouldn’t be enough olives to use the presses, and he would lose the premiums he had paid. However, if the crops turned out to be abundant, he could utilize his option by using the press capacity to generate profits. Fortunately, the olive crop proved strong, making his options profitable.
Aristotle even held this incident as proof that philosophers could get wealthy should they apply their efforts in that direction.
This framework is usually applied in modern R&D investments, where firms often invest capital in advance in anticipation that the research results will allow them to commercialize the idea.
If the idea ends up being viable, the firm can use it to generate profit or offer it for sale to another entity, just as Thales did.
However, if the concept proves unsuccessful, the option expires without value, and the firm forfeits the upfront payment.
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Takeaway: Thales’ Olive Bet Left a Legacy in Modern Finance
Thales had a profound impact not only on philosophy but also on finance. His insight into the olive harvest laid a foundation for enduring principles that align with modern financial theories.
Thales’ olive bet can be likened to an early form of options contracts, underscoring the concept of risk management and the idea of hedging against adverse outcomes.
In his work in “Politics,” Aristotle acknowledged his wisdom and philosophy, highlighting how philosophers could amass substantial wealth with such strategic thinking.
