Porbability of shortfall vs. Cost to Insure against
Fallacy 2: Stocks are a good inflation Hedge
Correlation is the tendency of different data series to move together over time.
There is no correlation between stock returns and inflation in the
Stocks for the Long Run
Buy low, sell high. Is harder than it looks
Dont think you are smarter than everyone
Dont follow stock tips
Dont follow the fads
Efficient Markets Theorem
The stock market is efficient TANSTAAFL
All information about a companys
Defined Benefit Pension
A pension is a regular monthly payment to a person so that they can live without
Defined benefits pension plans pay a monthly amount determined by a pension
Defined benefits plans are going awa
How to not invest in Stocks
Risk and Return
The more risk you take the more expected return there is.
o Low Risk TIPS
o Medium Risk Stocks
o High Risk Derivatives
Be Smarter than anyone else.
Efficient Market theory says that all available information i
Risk and Economic Decisions
When risk is present:
Good decisions can have bad outcomes.
Bad decisions can have good outcomes.
When you observe a good outcome, you cannot conclude that it was the result of a good
When you observe a bad outcome
Marriage and Divorce
Gains from Shacking up
Downs to Shacking up
Not good companionship
Couples that live together before marriage l
Applied Life Cycle Economics
Standard of living is a measure of consumption of goods and services
Economic theory provides a prescription for your economic health:
Maximize your standard of living
Smooth your standard of living over time
Protect your s
Borrowing in Smoothing consumption are not possible.
C100 (A100, W100) = A100 + W100
Heres your consumption function for age 100. Although we dont know what A100 will be
we have a plan.
Assuming assets of A99, what
Dealing with Uncle Sam
What are the tax bases robust enough to fund a modern government?
What taxes will you pay?
Federal/state personal income tax
Federal/state corporate income tax
Federal/State Estate and gift tax
49,500*.15+1,675 = $9,107.5
Marginal Tax: 15%
Effective Tax: 11%
Total Marginal Tax Rate: Tax rate on next $1 of income
Federal Effective Tax Rate: Taxes/Total Income
Capital Gains Tax rate: 15%
Change in Capital: 0%
Week 3 Life Time Budget Constraint
Life Time Constraint
Lets suppose r > 0
Cy + Co = W
Co = S + rS
Co = S (1+ r)
By algebraic Magic:
Co = (1+r)(W-Cy)
Cy + Co/(1+r) = W
What would Homo Eonomicus Do?
The rational person would want to consume as much as y
Week 3 Interest Rates
Different Interest Rates
Interest rates are set by the market e.g. supply and demand.
What factors influence Rates?
Default risk is the chance that the borrower will not repay
Reinvestment risk is the chance that rates will change
Thinking in Present Value
(And: The Most Powerful force in the Universe)
Ex: You invest $1000 into a Certificate of Deposit at Bank of America, which earns
10%* annual interest
interest is like a rental fee
Cash Flow Timeline
Ex: $1000 in
Opportunity Cost of getting a college degree:
The main reason starbucks can charge $4 for a coffee is that there isn't another shop
next door charging $1 or $2.
Starbucks most strategic advantage is its well-trafficked locations.
What is St
EC 171: Personal Life-Cycle Economics
INTRODUCTION: Week 1
A conceptual framework to answer life's financial questions:
Life Cycle theory of Saving and Consumptions: (Simple Arithmetic)
Sustainable Standard of L
Financial Planning vs. Financial Economics
Fincancial planning starts with goals:
How much will that cost? When
What rate do you expect to earn on investments?
arrive at how much to save now
Financial Economics starts with resources:
What do you ha