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Finance and Insurance as Powerful Forces in Our Economy and Society – Yale, ECON 252, 1.1

Posted on | January 26, 2009 | 6 Comments

This is synopsis two of two from lecture one of Dr. Shiller’s Yale ECON 252 course: Financial Markets.  Go to the ECON 252 link to access all synopses to this point.

Dr. Shiller introduced the Teaching Assistants and course syllabus during the initial lecture.  He has been teaching the course for over 20 years and many of his students have gone on to work at major financial institutes; both nationally and globally.  The required reading for the course is as follows

Faboozi, et al – Foundations of Financial Markets and Institutions

Seigel – Stocks For the Long Run

Shiller – Irrational Exuberance

The subprime crisis is an issue that is extremely important in the field of finance.  Dr. Shiller recently published The Subprime Solution: How Today’s Global Financial Crisis Happened and What to do About It.  The subprime crisis was created by offering a financial technology to everyone.  While in theory this is a great idea, sometimes it does not work and creates failures.  Finance as a technology is important to understand because it often evolves our lives, although sometimes in a dangerous way such as the subprime crisis.  If you were to look back 15 years, many of you would not even consider putting your banking information on a computer; today, it is unheard of not to.  The technologies in finance will ultimately change the way we see this subject in the future.

Morality is a key issue when discussing finance.  Many individuals are jealous of those who have created a great deal of wealth.  William Graham Sumner, a Yale graduate, stated that people should seek their own interests and not feel guilty.  If your desire is to make $1 million than that is your choice.  Ultimately, making money is the result of doing good things for society.  Most people who have built up a great deal of money have done it by creating something for other people to use or utilize.  The question remains “is it moral to make money just for yourself?”  This is an issue we will discuss at length on Subprime Blogger.  We will have a brief article and encourage discussion from our readers to see how you feel about making money just for yourself.

Philanthropy is the one true way to deter the idea that money is the root of all evil.  It is truly impossible to consume $1 billion by oneself so why not give some of it away.  You can only drive one car at a time, so why do you need 20?  You can only live in one house, so why do you really need three or four?  These are questions that some wealthy individuals need to ask themselves.  Should one live high and mighty or give back to those in need?

The most important theoretical concept in finance is the pooling and hedging of risk. This idea introduces probability theory and the hardest mathematical portion of the course.  To put it in layman’s terms, an insurance company does not want to put all their risk in one demo-graphical area.  If a home insurance company were to only write insurance plans for individuals living in Denver, Colorado, then they are not hedging their risk.  What if there was an intense snow storm that lasted 20 straight days and one third of Denver households were destroyed?  The insurance company would not only suffer, but would most likely fail.  If that same insurance company had written policies for homes throughout the United States, they could use the money from the other insurance policies in Florida, Texas, California, and on and on, to pay for the damages done in the Denver area.

Some interesting facts from the first lecture include

  • The Endowment at Yale is approximately $2 million per student.
  • Jeremy Siegel and Robert Shiller met waiting in line for an x-ray.  The line was in alphabetical order and Siegel and Shiller were back to back.
  • Robert Shiller correctly predicted the top of the Stock Market bubble in 2000 and the top of the housing bubble in 2005
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Comments

6 Responses to “Finance and Insurance as Powerful Forces in Our Economy and Society – Yale, ECON 252, 1.1”

  1. » Subprime Blogger » Finance and Insurance as Powerful Forces in Our … » Subprime Mortgage Refinance
    January 26th, 2009 @ 8:06 pm

    [...] news by unknown « “I Can’t Pay The Rent” – A Landlords Take on What to Do– Mortgage [...]

  2. Doug
    January 27th, 2009 @ 12:08 pm

    “Ultimately, making money is the result of doing good things for society.”

    This is the part of Greenspans personal theory that was proven to be incredibly wrong. As the value of instruments is marginalized the money that is created is the result of doing NOTHING. It is only HOPED that that money is put to good use.

  3. Subprime Blogger » Finance and Insurance as Powerful Forces in Our Economy and Society - Yale, ECON 252, 1.2
    January 27th, 2009 @ 5:59 pm

    [...] first synopsis of Finance and Insurance as Powerful Forces in Our Economy and Society is available for review by clicking the link.  The second half of the initial lecture was Dr. [...]

  4. admin
    January 27th, 2009 @ 6:06 pm

    Doug, this was just Dr. Shiller making the overall evaluation that most people who have a great deal of money have done something to improve society. Of course, this doesn’t always hold true.

  5. Doug
    January 31st, 2009 @ 7:35 am

    Certainly that is true. But I think this situation is covered by the expression that “one bad apple spoils the bunch.” Whether that is fair or not.

    I’ll even concede that no one actually meant for this to happen, the problem is that they saw it happening, the bubble was obvious and the criminal activity was obvious. It was just ignored by the SEC and the FBI.

    Anyway, I want in on the next cycle of this travesty. Recognizing that the US is a bubble driven economy, and we evidently are going to fight getting of the roller coaster even though it makes us puke our guts every time, What is the next bubble going to be in?

  6. Doug
    January 31st, 2009 @ 7:37 am

    Oh, I meant to add, what would the outcry be if the police were blatantly ignoring a murderer who was running rampant across the country?

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