The basic tools of finance

Target of finance = making a decisions regarding the following 3 aspects) - alocation of resources (saving = consumption of tomorrow) - over a time - handling of risk

Investment Decision by comparing the currnet value (future) / (1 + r)**N

• RUle of 70: x% interest rate = 70/x years to make it double
• Risk aversion: we disklike uncertainty
  • utility function is concave (diminishing returns(utility) of utility)
  • Rist averter / Risk lovers
• Insurance : managing risk by pooling the risk
  • Person facing a risk pays a fee, and accepts part or all of the risk
  • cf. Problems in insurance markets
    • adverse selection: hight-risk person benefits ore from insurance
    • moral hazard: people with insurance have less inentive to avoid risky berhavior