Chapter 27 talks about the basic tools of finance, the decisions people make due to the of risk and time, to choose what to invest in/ financial decisions. Because savings can earn interest, the sum of money today is more valuable than the same sum of money in the future. A person can compare sums from different times using the concept of present value. The present value of any future sum is the amount that would be needed today, given prevailing interest rates, to produce that future sum. Because of diminishing marginal utility, most people are risk averse. Risk averse people can reduce risk by using insurance, through diversification, or by choosing a portfolio with lower risk and lower return. The value of an asset, such as a share of stock, equals the present value of the cash flows the owner of the share will receive, including the steam of dividends and the final sale price. According to the efficient markets hypothesis, financial markets process available information rationally, so a stock price always equals the best estimate of the value of the underlying business. Some economists question the efficient markets hypothesis, however, and believe that irrational psychological factors also influence asset prices. Overall, this chapter was a good read and the concepts were pretty easy to grasp and understand. On a scale of 1-3 I would give this chapter a difficulty rating of 1.
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