FNCE2000 3 20212 L01 handout PDF

Preview

Summary

FNCE2000 3 20212 L01 handout with some explaination and also lecturer details...

Description

Introductory Personal Finance Lecture 1 Carsten Murawski Brain, Mind & Markets Lab

Outline of today’s lecture 1. Introduction to the subject 2. What is finance and what is finance for?

An introduction to personal finance in four memes books

Many Australians frequently worry about their personal finances

•

About two thirds of Australians report that they worry about money on a monthly, weekly or daily basis

KEY DRIVERS OF FINANCIAL ANXIETY 0

10

20

30

40

50

Financing retirement

•

•

Only about one in five people rate their financial wellbeing as either ‘very high’ or ‘high’ Key drivers of financial anxiety include the financing of retirement and providing for the family’s future

57.3

Providing f or f amily's future

50

Medical bills/healthc are

49.3

Non-essentials (holidays, eating out)

48

Home improvements & mainten ance

47.5

Raisin g $2,000 in an emergency

47.1

Major household items

46.9

Mortgage, rent, housing costs

46

Source: NAB Australian Wellbeing Survey Q1 2020; 0: not at all concerned, 100: extremely concerned

References: Breitbach et al., FinFuture – The Future of Personal Finance in Australia, white paper, The University of Melbourne, 2019

60

70

Indeed, many Australian households are exposed to severe financial weaknesses

•

About 95% of Australian families are currently underinsured

250 200 150

0.282

0.233

References: Breitbach et al., FinFuture – The Future of Personal Finance in Australia, white paper, The University of Melbourne, 2019

0.247 0.237

Source: OECD, Household net worth (indicator), 2020; household debt in % of net disposable income

0.185

0

nd m d da ea rg en lia d ds ay rk la do lan na or ou e d tra lan an rw ma Ire ing F in Ca K mb S w u s tz er erl No en A i th K D xe d S w Ne Lu ite n U

0.196

50

0.231 0.207 0.206

100

0.372 0.353

239

223

238

188

217

184

186

148

Many have inadequate savings to deal with financial shocks

140

•

Most working Australians are considered to have inadequate retirement savings

141

•

Australia has one of the highest old-age poverty rate among OECD countries

OLD-AGE POVERTY 300

181

•

HOUSEHOLD INDEBTEDNESS

0.438

Australia has one of the highest levels of household indebtedness among OECD countries

282

•

0.5 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0

U PN ISR AF SA GR US EX TU V A EST OR Z U B A M L L K RO J Source: OECD, Poverty rate (indicator), 2020; 66-year olds or more

5

(Radical) uncertainty – the ‘elephant’ in the financial wellbeing room?

KEY DRIVERS OF FINANCIAL ANXIETY 0

10

20

30

40

50

Financing retirement

70

57.3

Providing f or family's future

50

Medical bills/healthc are

49.3

Non-essentials (holidays, eating out)

48

Home improvements & mainten ance

47.5

Raisin g $2,000 in an emergency

47.1

Major household items

46.9

Mortgage, rent, housing costs

60

46

Source: NAB Australian Wellbeing Survey Q1 2020; 0: not at all concerned, 100: extremely concerned

6

Climate change, financial wellbeing and mental/physical wellbeing

Drought-related stress

Climate-related stress and suicide risk

Farmers in NSW experience significant stress about the effects of drought on themselves, their families, and their communities. Farmers who are younger, live and work on a farm, experience financial hardship, or are isolated are at particular risk of drought-related stress. References: Austin, et al., Drought-related stress among farmers: findings from the Australian Rural Mental Health Study, Med J Aust, 2018; Hanigan et al., Suicide and drought in New South Wales, Australia, 1970–2007, PNAS, 2012

7

Many Australians have regrets about their finances

•

•

Most regrets are related to financial behaviours: not saving enough, not investing enough, not budgeting/planning enough The fourth was related to financial education: not learning more about finances/money

REGRETS ABOUT FINANCIAL CHOICES 0

0.05

0.1

0.15

0.2

0.25

Not saving enough

0.35

0.4

0.45

0.399

Not investing enough

0.261

Not bu dgetin g/planning enough

0.258

Not learn ing enough about finance

0.201

Spending beyond my means

0.197

Not sh oppin g aroun d enough for better deals

0.159

Making poor investment choices

0.146

Not working enou gh

0.132

Getting a credit card

0.111

Borrowing too much

0.105

Increasing credit card limit Other

0.3

0.1 0.031

Source: UOM FinFuture Consumer Research, 2019

8

A number of barriers keep people from improving their finances

•

Lack of trust in financial institutions or advisers

•

Finding finance overwhelming

•

Not having the skills to improve one’s finances

•

Finding finance difficult to understand

•

Not enough time to spend on managing their finances

BARRIERS TO IMPROVING FINANCES 0

0.05

0.1

0.15

0.2

I do not trust financial institutions or advisers

0.229

I do not have the skills to improve my finan ces

0.161

I do not have the time to spend on managing my finances

I have little interest in m oney/finance The right information about finance is not available to me

0.3

0.277

Thinking about my finances is overwhelming

I find finance difficult to understand

0.25

0.158

0.115

0.108

0.1

Source: UOM FinFuture Consumer Research, 2019

9

A major barrier to ‘good’ financial decisions is complexity

•

Complexity of products (e.g., private health insurance policies)

•

Complexity of contracts (e.g., ‘boilerplate’ aka standard-form contracts, product disclosure statements)

•

Complexity of distribution (e.g., marketing, data/algo ‘biases’, ‘dark patterns’)

•

Size of search space (e.g., private health insurance, superannuation investment options)

10

The subject will focus on major financial decisions people have to make during their lifetime and present a framework to help you to make better financial decisions

• The overall aim of this subject is to provide a solid basis of financial knowledge for personal financial decisions • It covers the major financial decisions, related financial instruments, and as well as a conceptual framework to evaluate these instruments during the decision-making process • Our analysis will always start with a core financial problem people face, consider the scientific evidence we have about this problem and subsequently discuss potential solutions

In our journey, we will draw on various disciplines: • Economics and finance • History • Behavioural/decision sciences (e.g., psychology) • Mathematics and statistics • Law and regulation • Computer science (e.g., machine learning, AI) • Ethics • Literature

Schedule of lectures • Thursdays 2:15 – 4:15 pm • Online only until further notice (Zoom link available on LMS) • Switch to dual delivery (on campus and livestreaming) if/when possible • All materials will available on LMS • You are expected to read the mandatory readings • During lectures, content will be discussed and applied • Lectures will be recorded

Week

Date

Topic

1

29/07/2021

Introduction / What is finance and what is finance for?

2

05/08/2021

Financial wellbeing and financial decision-making

3

12/08/2021

Money and cash flow

4

19/08/2020

Consumption and saving

5

26/08/2020

Borrowing and credit

6

02/09/2021

Investing

7

07/09/2021

Buying a property

8

16/09/2021

Funding retirement

9

30/09/2021

Insurance

10

07/10/2021

‘Emergency finance’

11

14/10/2021

Providing financial advice

12

20/10/2021

The future of personal finance

Bloom’s taxonomy of learning

Source: Fracus Learning

Schedule of tutorials • One 1-hour tutorial per week (starting in Week 2)

Week

Tutorial Topic

1

No tutorial

2

Matching goals to financial products

3

Financial wellbeing and decision-making

4

Money and cash flow management

• Move to on-campus if/when possible

5

Consumption and saving

6

Borrowing and credit

• Each week, one tutorial will be recorded

7

Investing

8

Buying a property

9

Funding retirement

• Online via Zoom only (see LMS for exact starting time)

10

Insurance

11

‘Emergency finance’

12

Providing financial advice

Your tutors ● Four talented tutors (see LMS “Staff Information” for consultation hours)

Karlo Doroc

Anthony Hsu

Michelle Lee

Peter Wu

● How to get help: • • • • •

Attend weekly Zoom consults to ask questions (see LMS for details) Post your remaining questions (outside of class/tutorials/consultations) on Ed 48-hour turnaround time Ed will be inactive during the last 24 hours prior to assignment submissions Questions received via email will not be answered (post on Ed) → positive externalities!

You

Degree

Why did you enrol?

3.33 3.33

11.67

81.67

Bachelor of Commerce

Bachelor of Science

Bachelor of Biomedicine

Other

What do you expect to learn?

Assessments

• Mid-semester test

Assessment Task

Individual or Group Individual

Due

Weighting

• Group assignment

Mid-semester exam

Weeks 6-8

20%

• End-of-semester exam

4,000 word group assignment (usually in groups of 3-4)

Group

Weeks 9-12

10%

2-hour end of semester examination

Individual

During the exam period

70%

• 2 hours • Hurdle requirement

Hurdle requirement: To pass this subject students must pass the end of semester examination

Other organisational matters • The following resources are / will be available on LMS: • Subject guide • Lecture slides • Lecture recordings • Required & supplementary readings •

For administrative issues → Stop 1: https://students.unimelb.edu.au/stop1 • Enrolment issues • Assignment extensions • Etc.

Any questions?

Lecture 1

What is finance for? Carsten Murawski Brain, Mind & Markets Lab

What is the purpose of finance?

“Would you tell me, please, which way I ought to go from here?” “That depends a good deal on where you want to get to,” said the Cat. “I don’t much care where–” said Alice. “Then it doesn’t matter which way you go,” said the Cat. “–so long as I get SOMEWHERE,” Alice added as an explanation. “Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

Activity 1: What is finance? Reading: Robert C. Merton, A Functional Perspective of Financial Intermediation, Financial Management, 24(2), 23-31, 1995 Questions: 1. What are the (key) functions of the financial system? 2. What is the advantage of a functional view of the financial system compared to an institutional view? 3. Which functions of the financial systems do consumers use? 4. Map one consumer financial product/service to each function. (Questions also available on Canvas)

Who is Robert C. Merton?

Functions of the financial system (according to Merton) Functions 1. Provision of payments system for the exchange of goods and services 2. Provision of a mechanism for the pooling of funds to undertake large-scale indivisible enterprise 3. Provision of a way to transfer economic resources through time and across geographic regions and industries 4. Provision of a way to manage uncertainty and control risk 5. Provision of price information that helps coordinate decentralised decision-making in various sectors of the economy 6. Provision of a way to deal with the asymmetricinformation and incentive problems when one party to a financial transaction has information that the other party does not

Institutions (examples) AusPayNet, NPP, SWIFT Banks, superannuation funds Banks, stock markets, private equity funds Insurance companies, swaps markets Commodities markets, options markets

Insurance companies, contracts

Reference: Robert C. Merton, A Functional Perspective of Financial Intermediation, Financial Management, 24(2), 23-31, 1995

Functions of the financial system (according to Merton) Functions 1. Provision of payments system for the exchange of goods and services 2. Provision of a mechanism for the pooling of funds to undertake large-scale indivisible enterprise 3. Provision of a way to transfer economic resources through time and across geographic regions and industries 4. Provision of a way to manage uncertainty and control risk 5. Provision of price information that helps coordinate decentralised decision-making in various sectors of the economy 6. Provision of a way to deal with the asymmetricinformation and incentive problems when one party to a financial transaction has information that the other party does not

Consumer products (examples) Transaction account, EFTPOS, credit cards Savings account, superannuation account Brokerage account, AliPay Car insurance, overseas share holdings Google Finance, newspapers

Health insurance, home contents insurance

Reference: Robert C. Merton, A Functional Perspective of Financial Intermediation, Financial Management, 24(2), 23-31, 1995

Activity 2: What is finance for? Reading: Aristotle, Nicomachean Ethics, Book I (c. 350 BC), translated by W. D. Ross Questions: 1. What is the difference between means and ends? 2. What is the 'highest' end? 3. Name three things that you associate with happiness (in the Aristotelian sense) 4. Is finance a means or an end?

Who is Aristotle?

The highest aim (according to Aristotle) • NE is concerned with the overarching question about what constitutes a good life (how to best live) • Aristotle asserts that the highest good (end) has three characteristics: (1) it is desirable for itself, (2) it is not desirable for the sake of some other good and (3) all other goods are desirable for its sake • He asserts that eudaimonia (lit. “having a good guiding angel”; “happiness”, “flourishing”) constitutes such a highest good or end – other aims (health, wealth, etc.) are pursued because they promote eudaimonia • He further asserts that eudaimonia is achieved through activity of the rational part of the soul in accordance with virtue • Virtues include courage, temperance (soundness of mind, moderation), generosity, magnificence, magnanimity (greatness of the soul), ambitiousness, anger, friendliness, truthfulness and wittiness • Our potential to live a good life, according to Aristotle, is based on our capacity to guide ourselves by using reason (using reason well over the course of a full life is what eudaimonia consists in)

Some other aims that are not the ‘highest aim” • Pleasure (which is the way the majority of people think of happiness) • Refined and active way of ‘politics’, which aims at honour • Contemplation (developing intelligence) • Having virtue but not using it (being inactive) • Making money

What do you associate with happiness?

Activity 3: Can we measure happiness? Reading: Deirdre N. McCloskey, Happyism – The creepy new economics of pleasure, The New Republic, 8 June 2012 Questions: 1. What are some of the challenges with measuring happiness? 2. What is utilitarianism? 3. Why is utilitarianism problematic?

What are some of the issues with measuring happiness? • Cannot be observed/measured directly (actions/choices can be) • Incommensurability (even if ranking of alternatives is possible, ranking might only be possible with a non-interval scale) • Lack of interpersonal comparability • “Set point” results “It would not make sense to ask people to rank all their pleasures along a single quantitative dimension: this is just bullying people into disregarding features of their own experience that reflection would quickly reveal.” (Martha Nussbaum, 2008)

So what is finance for? – Summary of key findings • Finance is a means (or intermediate aim) in the ‘service’ of the ‘highest aim’ • According to Aristotle, the highest aim is eudaemonia (“happiness”, “flourishing”) • Eudaemonia can be achieved by living a virtuous life • Finance can be thought of as giving us scope to flourish • Eudaemonia is hard to measure, and any measurements are difficult to compare between people (‘everyone is different’, more about that next week) • The challenge in (personal) finance is to determine which actions to pursue in order best harness the available means (e.g., financial products/services) to flourish

Next week • Topic: financial wellbeing and financial decision-making • Please read the pre-lecture readings and answer the corresponding questions (will be posted on Canvas) • Tutorials start next week (all tutorials will be online, links available on Canvas)...