Finance vs. Economics
Economics and finance are closely intertwined, with each field informing and influencing the other. Investors pay close attention to economic data because it has a significant impact on the markets. It is crucial for investors to avoid viewing economics and finance as separate entities, as both are equally important and have practical applications.
In general, economics, particularly macroeconomics, focuses on the broader picture, such as the performance of countries, regions, or markets. Economics also examines public policy and its implications. On the other hand, finance tends to have a more individual, company, or industry-specific focus.
Microeconomics, a branch of economics, explains how certain conditions can affect industries, firms, or individuals. For instance, if a car manufacturer raises prices, microeconomics predicts that consumers will likely purchase fewer cars. Similarly, if a major copper mine collapses in South America, the price of copper is expected to rise due to restricted supply.
Finance also delves into how companies and investors assess risk and return. Traditionally, economics has been more theoretical, while finance has been more practical. However, in recent years, the distinction between the two has become less pronounced.
Is finance considered an art or a science? The answer is both.
Finance can be viewed as a science due to its strong foundation in related scientific fields like statistics and mathematics. Many modern financial theories resemble scientific or mathematical formulas. However, it is important to acknowledge that the financial industry also incorporates non-scientific elements, resembling an art. Human emotions and the decisions influenced by them play a significant role in various aspects of finance.
Modern financial theories, such as the Black Scholes model, heavily rely on the laws of statistics and mathematics derived from science. Without the initial groundwork laid by science, the creation of such theoretical constructs would have been impossible.
Version 1: Mental accounting pertains to individuals allocating money for specific purposes based on subjective criteria, such as the origin of the funds and the intended use for each account. The theory of mental accounting suggests that people tend to assign different functions to various asset groups or accounts, resulting in illogical and potentially harmful behaviors. For instance, some individuals may keep a designated “money jar” for a vacation or a new home while simultaneously carrying significant credit card debt.
Version 2: The concept of mental accounting involves people assigning money to particular purposes based on subjective factors, including the source of the funds and the intended use for each account. According to the theory of mental accounting, individuals tend to attribute different roles to different asset groups or accounts, leading to irrational and potentially detrimental behaviors. For example, some individuals may set aside a special “money jar” for a vacation or a new home, despite having substantial credit card debt.
