Technology and Invention in Finance – Yale, Econ 252, 3.2
Posted on | February 3, 2009 | 2 Comments
This is synopsis two 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.
Mental framing is something that is very important in finance. When countries want to make their citizens pay higher taxes, the only successful time that this can be done is during wars. This is the case because the citizens of the country feel a pride factor in their neighbors and loved ones fighting for their freedom. This gives the non-military citizens the mindset that it is their duty to pay higher taxes. A great example of mental framing is the article “Do You Think Economically?” The idea that money and event tickets are two different things is totally against economics. Both add up to the same amount so there really is no monetary difference.
Invention has greatly shaped the field of finance. Some of the inventions that shaped the field include paper, carbon paper, the typewriter, standardized forms, the filing cabinet and the postal service. All of these inventions help record keeping of financial information.
Another interesting invention is the idea of insurance. Many inventions had to take place before insurance even had a chance to be successful. There first had to be a contract which excluded certain policies due to specified causes. Then there is the invention of appraisals which stems from the invention of statistics. WIth that in mind, there has to be regulations. Each and every step of most common financial aspects of today’s life must include invention and technology.
In 1889, Germany came up with the idea of social security. The only way that they could successfully keep up with who had paid social security was through a stamping process. Each time an employee was paid, they had to get a card that was stamped. The employer was then forced to match the amount that the employee had to pay towards social security. After many years of this system, an employee could check his or her entires records of social security payments to know how much they would be getting after retirement. The United States did not adopt this practice until the Great Depression in the 1930s. This is a great example of information technology in finance.
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February 4th, 2009 @ 5:13 am
[...] Here is the original post: Technology and Invention in Finance – Yale, Econ 252, 1.2 [...]
February 7th, 2009 @ 3:21 pm
These lecture notes must be antiquated. Computers are by far the biggest recent invention, since they make possible the mortgage-backed securities, derivatives, tranches, repos, and all the other recent financial instruments that have returned to bite us in the rear. Without the power of modern computers, calculating the value of any of these instruments, or fixing mistakes in their calculation, would be so expensive that no one would touch them. This is why these things did not exist until computers.
They were brought into existence, traded, used by free enterprisers who saw opportunities to make money with them. No one except a few contrarians and theoreticians were interested in their long term effects on market stability. The contrarians used their understanding to make money, and the theoreticians were ignored and underfunded. So here we are.
Nobody but a test pilot would fly on a plane that was designed on a computer and never tested in the air under windy, stormy, icy conditions as well as clear skies. But we were willing to get on board all sorts of new financial instruments, because we were assured by their makers, as part of their sales pitch, that the instruments would not crash. And because we could make money with them.
Free enterprise makes smart people stupid by giving them tunnel vision, one effect of which is that they can’t see that they have tunnel vision. I don’t think anybody knows what to do about this, but seeing the problem is certainly the first step, and most people aren’t even there. Certainly not Dr. Shiller.