Finance in a Nutshell

Finance in a Nutshell

Finance started as a sub-discipline of economics, and although it has since evolved into a university major in its own right, the two still share many concepts. The main fields of finance, the science of lending and borrowing money, as well as investing available funds with the ultimate intention of increasing investors’ wealth, are corporate finance (corporations), public finance (governments) and personal finance (individuals). Academic finance has been revolutionized with technological advancements and inventions.

Finance is very quantitative in nature; even more so are financial mathematics, a challenging but afterwards very financially rewarding, endeavor. Regardless, mathematics and statistics could be thought of as the pillars of finance.

The theory of probability, outlined in any introductory statistics textbook, is at the heart of many financial theories. For example, the ideas of risk spreading and risk pooling are responsible for the lucrative industry of insurance. Nonetheless, the picture has once been very different. Paradoxically, when people needed it most, in the 1800s, when average life expectancy was early 40s, the overall majority was reluctant to accept the premises of life insurance. One reason was that salesmen tried to explain probability, and it seemed to potential customers that they were asked to place a bet, the outcome of which would benefit them if there were death. Naturally, deemed grim and blasphemous, the concept was rejected.

In the US, insurance is regulated at the state level, not at the federal. Matters are rendered somewhat less complicated for insurance companies by the National Association of Insurance Commissioners (NAIC), which acts almost as a parliamentary agency in setting regulations for the insuring firms. Since 1999, with the financial modernization introduced by the Gramm-Leach-Bliley Act, banks gained the right to act as insurers.

Avenue of the Americas and 57th street. Photo by Elena

A potential problem is the selection bias. Financial data, uninterrupted for long periods of time, is only available for a few countries (US, UK). Other states’ data are either missing (Russia’s stock market gradually disappeared after 1917, China’s in 1949, with their respective Communist Revolutions) or interrupted by World Wars I and II. Some speculate that maybe the US success in the matter should be attributed to its stock market being the first and remaining unencumbered, while providing shaky grounds for generalization to the world at large or even to America’s own future.

An interesting aspect is the way the financial community is portrayed in the popular media, with financiers notorious for being the “bad guys”. To illustrate, in the Wall Street movie, Gordon Gekko, portrayed by Michael Douglas, gives the unforgettable speech in which he immortalizes the phrase “Greed is good!” Whether the 2010 sequel, Wall Street: Money Never Sleeps, with the addition of Shia LeBeouf to the initial cast, restores faith in financiers’ humanity depends on one’s interpretation.