Its History, and Importance Explained
- KEY TAKEAWAYS
- History of Finance
- The Importance Of Finance
- 7 Reasons Why Finance Is Important?
- what is Behavioral Finance
- What is the role of behavioral finance?
- behavioral finance biases
- behavioral finance biases examples
- behavioral finance designation
- List of Top 15 Behavioral Finance Books
- What is the highest paid finance job?
KEY TAKEAWAYS
1) Finance is a term broadly describing the study and system of money, investments, and other financial instruments.
2 ) Finance can be divided broadly into three distinct categories: public finance, corporate finance, and personal finance.
3) More recent subcategories of finance include social finance and behavioral finance.
4) The history of finance and financial activities dates back to the dawn of civilization.
Banks and interest-bearing loans existed as early as 3000 BC.Coins were being circulated as early as 1000 BC.
5) While it has roots in scientific fields, such as statistics, economics, and mathematics, finance also includes non-scientific elements that liken it to an art.
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History of Finance
Finance, as a study of theory and practice distinct from the field of economics, arose in the 1940s and 1950s with the works of Harry Markowitz, William F. Sharpe, Fischer Black, and Myron Scholes, to name just a few.
Particular realms of finance—such as banking, lending, and investing, of course,
money itself—have been around since the dawn of civilization in some form or another.
The financial transactions of the early Sumerians were formalized in the Babylonian Code of Hammurabi (circa 1800 BC). This set of rules regulated ownership or rental of land, employment of agricultural labor, and credit.Yes, there were loans back then, and yes, interest was charged on them—rates varied depending on whether you were borrowing grain or silver.
By 1200 BC, cowrie shells were used as a form of money in China. Coined money was
introduced in the first millennium BC. King Croesus of Lydia (now Turkey) was one
of the first to strike and circulate gold coins around 564 BC—hence the expression, “rich as Croesus”.
In ancient Rome, coins were stored in the basement of temples as priests or temple workers were considered the most honest, devout, and safest to safeguard assets. Temples also loaned money, acting as financial centers of major cities.
The Importance Of Finance
Now you know why finance is important for businesses. It’s not just about making money, it’s
about making the right decisions that will lead to success. Finance is an essential function in any company and should be taken seriously by all business owners.
Finance is one of the most important functions in businesses. It involves financial planning, which
helps businesses rather than hurting them. Good finance management enables companies to make better decisions and good forecasting ensures that they are well-prepared for worst-case scenarios. Much like oxygen to human beings; without it, no business can survive.
7 Reasons Why Finance Is Important ?
1. Finance Is Essential For Any Business To Succeed
2. Finance Provides Information For Decision-Making
3. Finance Assists In Measuring Performance And Efficiency
4.Finance Is Needed To Make The Right Investment Decisions
5. Finance Provides Better Control Over Expenses
6. Finance Can Prevent Or Lessen The Impact Of Financial Crises
7. Finance Helps Reduce Time Spent On Administrative Tasks
what is Behavioral Finance ?
There was a time when theoretical and empirical evidence seemed to suggest that conventional financial theories were reasonably successful at predicting and explaining certain types of economic events. Nonetheless, as time went on, academics in the financial and economic realms detected anomalies and behaviors which occurred in the real world but
could not be explained by any available theories.
It became increasingly clear that conventional theories could explain certain “idealized” events—but that the real world was, in fact, a great deal more messy and disorganized, and that market participants frequently behave in ways that are irrational, and thus difficult to
predict according to those models.
As a result, academics began to turn to cognitive psychology in order to account
for irrational and illogical behaviors which are unexplained by modern financial theory. Behavioral science is the field that was born out of these efforts; it seeks to explain our actions, whereas modern finance seeks to explain the actions of the idealized “economic man” (Homo economics).
Behavioral finance, a sub-field of behavioral economics, proposes psychology-based theories to explain financial anomalies, such as severe rises or falls in stock price. The purpose is to identify and understand why people make certain financial choices. Within behavioral finance, it is assumed the information structure and the characteristics
of market participants systematically influence individuals' investment
decisions as well as market outcomes.
Daniel Kahneman and Amos Tversky, who began to collaborate in the late 1960s, are considered by many to be the fathers of behavioral finance. Joining them later was Richard Thaler, who combined economics and finance with elements of psychology in order to develop concepts like mental accounting, the endowment effect,and other biases that have an impact on people’s behavior.
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