- If you were going to design an independent space colony, who travels
far away to explore the geometry of the universe,
would you charge interest within the colony?
- in some instances but not in others
- Which do you think best explains why it does make sense to charge interest?
- Historically, animals,
land and other property was lent out, and a part of the actual growth of the living animals, crop, etc, where
given back to the lender.
- when a bank or someone loans money they should reasonably expect to
make back what they could have earned elsewhere, if they aren't running a charity.
- can help cover liabilities and losses for people who don't pay back
- helps generate business and keeps the economy moving
- Which do you think is most compelling of why it might not
sense to charge interest?
abuses of the system with interest way too high (for example, sharecropping, or in 1304 interest rates in Nuremberg were 220%!)
and the system may contribute to concentrating
wealth in the hands of a small minority.
- there is not enough money in existence to pay back all that is currently loaned out
- in numerous religions over time, including
Christianity, Judaism, and Islam, there were prohibitions against
charging interest on money to members of the community (usury), but
was ok for strangers. Lending to your neighbor was considered
philanthropy and part of a giving back to the community.
[Responsibilities of Community Membership]
- we can't plant gold coins and get a bumper harvest of more gold coins
- Which is most compelling in terms of the role of probability and
chance in finance?
- All financial forecasts, whether about the specifics of a business, like sales growth, or predictions about the economy as a whole, are informed guesses based on historical data and other analyses.
- Historical data is all we have to go on and there is no guarantee that the conditions in the past will persist into the future. It is also impossible to factor in unique or unexpected events, or externalities.
- Dividing reward/risk is a common ratio to compare risk versus reward.
Risking $500 to gain millions in a lottery
is a much better investment than investing in the stock market from a reward/risk perspective (millions/500). However, it is a
much worse choice in terms of the probability of losing all your money!
- Real-life situation:
Past student was told that her c.d. will be compounded monthly at 8% for 8 months, and is told that this 8% will apply each and every month (ie is the monthly rate). Let's say that she put in $1000. How much would her c.d. be worth at the end of 8 months
if the annual rate was indeed 8*12=96% instead of 8%?
- none of the above
What did the bank really mean?