Day 41 in MIT Sloan Fellows Class 2023, Managerial Finance1 - What is "Finance"? What is the purpose of Finance in business decision?
What is the finance?
The way in which money is used and handled; especially: the way in which large amounts of money are used and handled by governments and companies
Merriam-Webster
Large amount sounds very subjective, but finance is a little bit subjective anyway.
According to the professor, valuation is the central key of finance.
Thus, how to measure the value and how to create the value from financing are key activities in finance.
Valuation is also critical for making decisions and is affected by the following factors.
- Timing
- Risk
- Interaction with other market participants
How does finance affect our world?
The financial market connects two big players, households and firms.
They supply labor and products to each other.
How?
There are two major ways/financial products.
Investment and Insurance.
Investment is to transfer money across time and space.
Insurance is to protect the value of an asset.
Finance history
Finance has a long history.
The first coins was developed in Turkey, Greece, India and China in B.C. 600.
The first banks were temples in ancient Rome and the first modern bank is associated to medieval Italy around 1472.
The first company was established in 1602 as the Dutch East India Company.
However, this long history is about the history of failures.
Starting from "the tulip mania" in 1637, the first emerging market crisis in 1825, and the crash in 1925 to dot com bubble in 2000 and the financial crisis in 2008.
Market failure and market wisdom
Game stop share price is one of the symbol of market failure.
However, there are some case studies of market wisdom.
Rogers Commision report published in 1986 and the challenger explosion was caused by O-ring.
Market responded properly to this incident and this is a proof of market wisdom.
