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The primary purpose of finance is to move money through time. Finance can turn streams of income into lumps of capital, and vice versa, so you can do fantastica

The primary purpose of finance is to move money through time. Finance can turn streams of income into lumps of capital, and vice versa, so you can do fantastical things like buy a house — without working out a 30 year installment plan with its current owner. Finance can IPO a startup so that it can hire people to write code and use that code to make money. Finance can let a farmer enter a contract to sell his future crop today, when he’s buying seed and fertilizer, without worrying that the grain price will plummet. Insurance — finance’s cousin — moves risks using money, so your life won’t be ruined forever if your crop dies or your house burns down.

betwixthewires 5y ago
I'm glad to see this response here, this distils it to it's basic utility exactly. I'd only add that assessing risk, that is, assigning a numeric and subsequently monetary value to the likelihood that a prediction will not happen in the future, enables this to occur. Without being able to move risk around you cannot move money through time.
opportune 5y ago
I don't think there is a separation between finance and insurance like that. Risk is part of finance as well. For example by bundling loans financial entities can pool risk similarly to insurance - but it's not insurance. In fact I'd go so far as to say all of finance is about managing risk because assets (all loans are assets)/financial positions generally fall on a line from <not risky, low-yield> to <risky, high-yield>. This is true for both aggressive speculative hedge fund managers and conservative banks. Everybody (who knows their shit) is following the Kelly Criterion in some way as a result, even if they may not know it. And your competitive advantage as a financial entity is generally to price risk better than other market participants. This still benefits the public because by pooling, commodification of financial instruments, and accurately assessing risk financial entities are able to compete against each other in a mostly-open market leading to competitive and fair pricing.

betwixthewires 5y ago

I'm glad to see this response here, this distils it to it's basic utility exactly. I'd only add that assessing risk, that is, assigning a numeric and subsequently monetary value to the likelihood that a prediction will not happen in the future, enables this to occur. Without being able to move risk around you cannot move money through time.

opportune 5y ago

I don't think there is a separation between finance and insurance like that. Risk is part of finance as well. For example by bundling loans financial entities can pool risk similarly to insurance - but it's not insurance. In fact I'd go so far as to say all of finance is about managing risk because assets (all loans are assets)/financial positions generally fall on a line from <not risky, low-yield> to <risky, high-yield>. This is true for both aggressive speculative hedge fund managers and conservative banks. Everybody (who knows their shit) is following the Kelly Criterion in some way as a result, even if they may not know it. And your competitive advantage as a financial entity is generally to price risk better than other market participants. This still benefits the public because by pooling, commodification of financial instruments, and accurately assessing risk financial entities are able to compete against each other in a mostly-open market leading to competitive and fair pricing.