The idea behind financial planing is to ensure greater wealth, financial security and attainment of financial goal in short. Of course saving for the rainy day comes in very handy, but what if the rain starts as a drizzle and continues over the course of time causing constant damage from the start. My emphasis here is particularly towards the decision by the U.S. government and the Federal Reserve to cut short term rates to encourage borrowing which has had a catastrophic impact on the savers of the country. The interest rates have been very disappointing from the point of view of the saving consumers though the decision is seen as a good one for the economy of America. Turns out not so good for Americans.
My question here is on the importance and extent of financial planning. I do understand that it's the sensible thing to do but it doesn't change the fact that many things today still are controlled by market forces or induced forces, the answers to which not any financial planning can come up with but the larger understanding of the power and sensible use of money by the Government.
Wednesday, March 31, 2010
Benefits of Sinning.
Having read a bit of Personal Financial Planning in the recent past made it quite hard for me to not take note of the term Sin Tax in Investopedia the other day. The term is explained as the state sponsored tax added to products like liquor, tobacco, alcohol, gambling etc to discourage consumers and reduce their consumption. These taxes needless to say generate massive government revenue.
What caught my attention here was finding a connection between the principle of Game Theory popularised by Dr. John Nash, who inferred that performance of one player directly affects the performance of the other, and the given form of tax. In the case of the imposition of the Sin Tax, the government totally depends on the decision of the other player, the consumer, to reap the benefits of tax. This would also be indicative of the government making money out of the "not so good" consumer decisions but from the economic perspective it generates revenue in the form of tax. Now though this may seem like a one sided game benefiting only the government, it reminds me also of another theory by Adam Smith which states that the best results in a group come from everyone doing what's best for themselves and the group. Now what puzzles me here is the criteria for judging what's best for the two parties (the government and the consumer), obviously liquor and tobacco and alcohol can't do much justice being termed good but yes income for government does stand good. The tax thus can be viewed from two perspective: The Game Theory perspective allows the government to benefit only when the other player makes the expected move and Adam Smith's theory of doing what's best for all so that both the parties benefit, gives another dimension of viewing it, the definition of benefit though remains ambiguous.
What caught my attention here was finding a connection between the principle of Game Theory popularised by Dr. John Nash, who inferred that performance of one player directly affects the performance of the other, and the given form of tax. In the case of the imposition of the Sin Tax, the government totally depends on the decision of the other player, the consumer, to reap the benefits of tax. This would also be indicative of the government making money out of the "not so good" consumer decisions but from the economic perspective it generates revenue in the form of tax. Now though this may seem like a one sided game benefiting only the government, it reminds me also of another theory by Adam Smith which states that the best results in a group come from everyone doing what's best for themselves and the group. Now what puzzles me here is the criteria for judging what's best for the two parties (the government and the consumer), obviously liquor and tobacco and alcohol can't do much justice being termed good but yes income for government does stand good. The tax thus can be viewed from two perspective: The Game Theory perspective allows the government to benefit only when the other player makes the expected move and Adam Smith's theory of doing what's best for all so that both the parties benefit, gives another dimension of viewing it, the definition of benefit though remains ambiguous.
Wednesday, March 17, 2010
The Preview of The Mind
I haven't had any formal relationship with Quantum Physics but I have had the chance of making acquaintance with it through the few scholars and "thinkers" I have spent time with and have now come to think of as good friends. They tell me that QP shows us the possibilities in this world, the limitless magnitude of things existing and even those that COULD exist. Another way of looking at it would show that our minds see only what we want to believe in, we are the creators and generators of reality. These physicists believe that there is constant movement happening all around us...things are happening endlessly and we are surrounded by it from all sides. And it is from these movements that we choose moments and see them as possibilities. For if reality were perfect and if every movement in existence was complete by itself then what difference would my being here or not being here make!Would it not make any difference whether I HAD skills, knowledge, intelligence,or NOT! Mathematics can give you assumptions and theories. But it's entirely up to YOU to choose the experiences. A paradigm could be that of the existence or non existence of God. Many believe IN it, many DON'T. The existence or non existence can't be proved with a theorem or derived from an equation, it boils down to the simple fact that the truth lies in the true understanding of the media around you. It's what you choose to see and how you perceive it that defines rationality for you. In my view there is no good or bad, it is all in the understanding of the mind that we perceive what to do and what not. Well, how now do we gain that understanding? Don't be hypnotized by the things around you, if the universe is as infinite as we think it is, and in that infinity if we are still existing, it has to be for a mighty cause, a reason so great that it sure might make the human mind look inadequate to comprehend such a thing! The truth lies here, the greatness of any human lies not in what he does to his body but rather what he does to his mind and what you do to your mind is limitless. Everything that you can think can be achieved. Change your mind, change your habits, change your circumstances, change your life. I believe that nothing is impossible to change. Talk of an addiction...if you are addicted to anything, it's only because you don't know how to dream better! When you let your mind go to places you thought impossible, reach out to things you consider inaccessible, you will realize you are already there! If it was really impossible it wouldn't exist and you wouldn't know of it. If it exists, it IS possible. Whether everything in the universe is synced or not, turns out the mighty infinite universe could still use us. We are put on the face of the earth to be creators..to make use of our gifts and intentionality. Let nothing interfere with your work of creating and building understanding. And when this happens you will find yourself so lost in knowledge that from there you will only witness the greater glory and manifestation of who you become. There is no loss from that point on..no failure because you will realize that you have already gotten to the place where reality meets the impossible!
Thursday, February 4, 2010
Why do we have firms at all?
Studying about small enterprises I stumbled upon "the butcher, the brewer and the baker" theory conceptualized by Adam Smith explaining the existence and relevance of enterprises that provide a specific service to the consumers based on their own skills (Free Lunch, David Smith,p.86).
Having said this, I am compelled to state the obvious question raised by David Smith in his book Free Lunch as to why do we have firms at all, given that we consume as individuals, why can't we produce the same way?
And he answers the question for us stating that about 3 million people are self employed in Britain and most of the businesses that grow up to be large enterprises start up as a one man business. As the business grows, there is requirement for more man power and skill and entrepreneurship, but of course there are some that prefer to remain a one-man business. The reason why most people choose to be self employed can be attributed to security of employment. But data states that majority of people work for others and this as stated by Adam Smith is due to factors like specialization, the division of labor, increased efficiency resulting in lower costs. A sole trader could still produce the same thing but will be incompetent in the factory price area. This could possibly be the reason for the existence of firms, they lower the final cost of the product sold. Sole traders though can still charge the high price sticking to the motto : you pay more but you get something better, or at least more individual. This holds true in the case of Art and Sculpture (among others of course). Because of the high level of skill and attention to detail involved and the "individuality" factor coming into play, it is not surprising to note that we haven't seen very many "large firms" dealing with the direct creation of art (eg. Maori Art Sculpture to name the most evident one present in New Zealand) as we see a sole trader or for that matter a small business deal with it.
It therefore would not be wrong to state that though the economies of scale is lower for small enterprises as compared to their larger counterparts, there are still existing areas where the small business dominates and despite the huge earning potential available empirical data suggests that big firms haven't found a firm footing into those sectors.
Having said this, I am compelled to state the obvious question raised by David Smith in his book Free Lunch as to why do we have firms at all, given that we consume as individuals, why can't we produce the same way?
And he answers the question for us stating that about 3 million people are self employed in Britain and most of the businesses that grow up to be large enterprises start up as a one man business. As the business grows, there is requirement for more man power and skill and entrepreneurship, but of course there are some that prefer to remain a one-man business. The reason why most people choose to be self employed can be attributed to security of employment. But data states that majority of people work for others and this as stated by Adam Smith is due to factors like specialization, the division of labor, increased efficiency resulting in lower costs. A sole trader could still produce the same thing but will be incompetent in the factory price area. This could possibly be the reason for the existence of firms, they lower the final cost of the product sold. Sole traders though can still charge the high price sticking to the motto : you pay more but you get something better, or at least more individual. This holds true in the case of Art and Sculpture (among others of course). Because of the high level of skill and attention to detail involved and the "individuality" factor coming into play, it is not surprising to note that we haven't seen very many "large firms" dealing with the direct creation of art (eg. Maori Art Sculpture to name the most evident one present in New Zealand) as we see a sole trader or for that matter a small business deal with it.
It therefore would not be wrong to state that though the economies of scale is lower for small enterprises as compared to their larger counterparts, there are still existing areas where the small business dominates and despite the huge earning potential available empirical data suggests that big firms haven't found a firm footing into those sectors.
Sunday, January 24, 2010
Boons of Small Enterprises
Having read Schumpeter’s views about innovations and inventions in the area of small and large enterprises in the past few days, it was next to impossible for me to not take note of the innovative genius of Sean O’Connor (who in 2001 owned a San Francisco club, Thee Parkside). With the downfall of the dot com bubble, the entrepreneur decided to focus his attention to cheaper food items and stumbled upon the idea of selling pan cake mix in pressurize cans and even got it patented in 2005. The concept was such a success that in 2008 his “Batter Blaster” grossed $15 million in revenue. The product is also retailed through Costco (Costco, Fortune 500) and Whole Foods, (WFMI, Fortune 500).
This example further highlights the theory that small enterprises are better equipped to introduce new technology or ideas as compared to their larger counterparts who proceed with any new innovation ONLY when the larger market appears assured. Sometimes it’s advantageous to start with a small market segment and build up a brand name through word of mouth and then expand. Empirical studies show that this rarely happens in the larger firms as their production structure is not very flexible owing to their economies of scale.
(source: CnnMoney.com/SmallBusiness2009)
This example further highlights the theory that small enterprises are better equipped to introduce new technology or ideas as compared to their larger counterparts who proceed with any new innovation ONLY when the larger market appears assured. Sometimes it’s advantageous to start with a small market segment and build up a brand name through word of mouth and then expand. Empirical studies show that this rarely happens in the larger firms as their production structure is not very flexible owing to their economies of scale.
(source: CnnMoney.com/SmallBusiness2009)
Sunday, January 10, 2010
Understanding Small Enterprise Finance
Having started summer school, (more due to my dismal performance in the previous semester than anything else), I actually love every minute of it now (without any compulsion i.e,).It might have something to do with the Prof I reckon (dote on his teachings) and also on the paper I was given, "small enterprise finance". Doing my research to comprehend better the idea of small enterprises, I stumbled upon the Neoclassical Economic concept of Marginal Change. To make it short and simple for my "non finance" friends, I just wanted to share the beauty of the way the base of small business finance is explained by 3 veterans:
They infer that Finance is a well developed body of idea based on the neoclassical economic principles, three of which act as its backbone.
1. Time is money:
This concept coined by Fisher explains the time value of money in terms of compound interest, discount rate and the likes, which can further be developed mathematically to support areas like project appraisal and so on.
2. Don't put all your eggs in one basket:
The idea behind surrendering the eggs to not one but several baskets (the ingenious thought of Markowitz) was actually the lesson on diversification, which now is generalized into the Capital Asset Pricing Model or CAPM.
3. You can't fool all the people all of the time:
Modigliani and Miller discovered the all so obvious but less thought of fact, that in the presence of perfect competition and profit maximization and zero individual influence on price, it was nearly impossible to have market efficiency and arbitrage.
while the assumptions (the food and fodder for economics) may turn out to be otherwise at times, the fact remains that they DO constitute a very strong base to the theories that have the impeccable ability of great predictions!
They infer that Finance is a well developed body of idea based on the neoclassical economic principles, three of which act as its backbone.
1. Time is money:
This concept coined by Fisher explains the time value of money in terms of compound interest, discount rate and the likes, which can further be developed mathematically to support areas like project appraisal and so on.
2. Don't put all your eggs in one basket:
The idea behind surrendering the eggs to not one but several baskets (the ingenious thought of Markowitz) was actually the lesson on diversification, which now is generalized into the Capital Asset Pricing Model or CAPM.
3. You can't fool all the people all of the time:
Modigliani and Miller discovered the all so obvious but less thought of fact, that in the presence of perfect competition and profit maximization and zero individual influence on price, it was nearly impossible to have market efficiency and arbitrage.
while the assumptions (the food and fodder for economics) may turn out to be otherwise at times, the fact remains that they DO constitute a very strong base to the theories that have the impeccable ability of great predictions!
Tuesday, January 5, 2010
Where are my twenties going?
That's the question everyone seems to be asking around me. Not to mention that everyone I ask the question to either counter-questions me or says ,' If only I knew'. Why the sudden need for everyone to know where their lives are headed? I mean, did we care where life was going when we were 10? No. Did we care where life was going when we were 17? No. It only hits hard at when we hit that despicable number - Twenty. Then everyone's suddenly talking utter tosh about climate change and marriage and turning relationships long-term and money and investing and blah, blah, blah... If you ask me, it doesn't even matter. None of us know what's going to happen anyway.
The only thing I know is this - if I waste all my time worrying in my twenties, I'm going to be doing something worse when in my thirties.
REGRETTING.
Now that's something I don't ever ever want to be doing.
...all credit to Nida :)
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