Technology and Invention in Finance – Yale, Econ 252, 3.1
Posted on | February 2, 2009 | 2 Comments
This is synopsis one of two from lecture three of Dr. Shiller’s Yale ECON 252 course: Financial Markets. Go to the ECON 252 link to access all synopses to this point.
Many times, the media portrays finance as unethical and evil. While there are some negative aspects of finance, for the most part, the study of finance is to assist the well being of all humans. Unfortunately, there are very few, if any, motion pictures about a philanthropist. Most movies with finance as a theme are based on unethical practices. In the current economy, almost everyone in finance is being blamed for the subprime crisis. The intention of subprime was not to bring down the global economy; it was to help everyone live the dream of owning a home.
Throughout your life, you endure long term risks to your human capital. Your human capital is the opportunity to use your ability to gain something positive in life. As one grows old, the inequality of human capital grows larger. After retirement there is an extremely wide gap between the haves and have nots. Sadly, there are too many individuals living in very bad situations after retirement. This is where finance comes into play. Ultimately, finance is about people; assisting people to live a better life.
Moral hazard is an extremely important aspect of finance. Moral hazard is the idea that when people are told they will definitely receive compensation no matter what, they become lazy. This is often the case in socialist societies. If everyone is given the same amount no matter how good of a job they do, then why should they work harder. They do not prosper from hard work. This is ultimately why socialism has failed in the past. People do not see a reason to work hard and enhance their life when they always receive the same benefits as the person next to them.
Consumption correlation is the comparision of consumption throughout the world. If one country consumes more, shouldn’t it make sense that another country consumes more and vice versa. Sadly, this is not the case. Once again, the rich get richer and the poor get poorer. It seems that when a country becomes financially successful they start consuming at an extremely high rate and other countries cannot keep up. The same is true when a country starts to see an economic decline. Their consumption greatly decreases, but often not at the same rate as other countries. This, in essence, is why the world does not have a perfect financial system. A perfect financial system would pool risks of EVERY single person from every country in the world, but as we know, this will never happen.
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February 2nd, 2009 @ 3:19 pm
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February 2nd, 2009 @ 6:37 pm
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