Influence on Analysis Over Economic Theory

We are under the influence of economic crisis, but no economic survey has ever told us about this muggy situation. The financial corridor has connected wide spectrum of traders, market analysts, and investors to take full advantage and spin money at a rapid fire pace even in this situation. Actually, economic market has never been so dreadful but we have assumed it as a money-generating machine without understanding its dark aspects and blindly running wild after it. The market and financial situations are same. They are still convulsing to absorb more money off course global demand is deepening but the market has still lots of charm on its face. Consumer products and services are still raging at great rates with more and more success. But we are psychologically dominated by the downturn of the financial market. On the other side we are blessed by Information Bridge that is electronic trading and hyper speedy up-gradation. Every thing is accessible to us and shareholders are facing high quality transparency just because of the maturity of information technology.

Our markets are mutually exclusive not internecine, they are not a predator to suck our blood and money every time from our nerves. If we approach it with positive attitude, financial training, Stock Exchange know how’s, structural stock market courses, and detailed analysis of the fundamental. Then you can spawn great piles of bucks rather than to stay at the bitter end. Considering the global economic scenario we can invest through care and risk as economic crises are not forever, it will turn back with the same flux. If you follow certain sectors to invest than it’s always good to go after analytical approach rather than speculation. You must know the strengths and weakness of your stock with the effect of the market and global scenario. Evaluation and prudent always gives constant and steady growth and leaves you at the profitable end.

Markets always show recovery and bounce and mainly the security markets where you think more and more after a long-term period. Here you can expect huge profits also, instead of instant monitory satisfaction. Many sector wise companies even both private & public need this sort of investment tactics to follow to churn profits. It’s never easy to absorb and enjoy lush green latina dollars every-time but we can take advantages from time to time. As market investments are rising to surging heights there is a high amount of reliability and the code of ethics, so that they cannot cheat the investors.

Fortunately, market credibility will not be under attack anyhow! And over the next few years achieving never-indistinctly defined financial stability should be our major area of concern. Our proper delving of company and study will avoid any unseen circumstances and inflation & deflation cannot affect our prosperity.

Fiscal Policy and the Challenging Economic Environment

In the face of the increasingly alarming global economic crisis, the Philippine government, as the institutional embodiment of the sovereign authority of the Filipino people, is challenged to fulfill its constitutional mandate to protect the general welfare.

Debates over what government must do to save the economy are happening almost everywhere, from public offices and school classrooms to wet markets and barber shops. It is argued that it is through its fiscal administrative power that government attempts to resuscitate the dying economy.

Public fiscal administration generally refers to the formulation, implementation and evaluation of policies and decisions on taxation and revenue administration; resource allocation, budgeting and public expenditure; public borrowings and debt management; and accounting and auditing (Briones 1983:2).

The hope of seeing real economic progress seems to be dependent on the success of the whole fiscal policy process. Fiscal policy derives its meaning and direction from the people’s aspirations and goals which are said to be embodied in the Medium Term Philippine Development Plan.

“The basic task of the Medium Term Philippine Development Plan…is to fight poverty and build prosperity for the greatest number of the Filipino people. We must open up economic opportunities, maintain socio-political stability, and promote good stewardship-all to ensure a better quality of life for all our citizens. We will focus on strategic measures and activities that will spur economic growth and create jobs. This can only be done with a common purpose to put our economic house back in working order” (Arroyo 2004).

But the big question is: how does government carry out its fiscal administrative function to really cushion the Filipinos from the adverse effects of the onrushing global financial crisis?

The Fiscal Policy as a Political Process

Lying at the heart of public fiscal administration are the fiscal policies shaped by the socio-economic and political interaction of internal and external policy environment. Internal policy environment includes the decision-making agencies of government such as Congress, the Office of the President and its support agencies, the National Economic and Development Authority, the Department of Budget and Management, the Department of Finance, and the Commission on Audit, among others. Internal environment also includes the private sector, interest groups, non-government organizations and people’s organizations in the society.

The external policy environment, on the other hand, encompasses foreign interest groups composed of international financial institutions like the World Bank (WB), the International Monetary Fund (IMF), and the Asian Development Bank, among others. Moreover, external policy environment includes the international agreements and economic cooperation such as the General Agreement on Tariffs and Trade (GATT), World Trade Organization (WTO), Asia and the Pacific Economic Cooperation (APEC), the Association of Southeast Asian Nations (ASEAN), the Organization of Petroleum Exporting Countries (OPEC), and institutions that extend Official Development Assistance (ODA), among others (Cuaresma 1996:46).

Professor Leonor Briones of the U.P. National College of Public Administration and Governance claims that “these foreign interest groups prefer to maintain a low profile in local fiscal politics. They do not have to come out in the open anyway-the WB-IMF has regular consultations with Philippine officials due to the enormity of the Philippine public debt; the MNC’s [multinational corporations] are represented by local dummies, and the foreign creditors by their Filipino proxies. In the open political contest, these foreign interest groups express their preferences by financially supporting their politicians. Where the local technocrats and bureaucrats are more significant in fiscal policy administration, they attempt to influence their nomination and appointment.” (Briones 1983:97)

This only means that the financial health of the country is at the mercy of the international financial creditors and policy bodies that issue our fiscal prescription. While it is often argued by scholars that the field of public administration must not be political in its very nature, fiscal administration as its sub-field is not free from political maneuvering as it is operating within the political system.

From the scholarly view of Professor Briones, fiscal policy has four major functions: (1) the allocation function, (2) the distribution function, (3) the stabilization function, and (4) the development function.

The major fiscal instrument in the allocation function of fiscal policy is the national budget. In general, a national budget is the financial plan of the government for a given fiscal year, which shows what its resources are, and how they will be generated and used over the fiscal period. The budget is the government’s key instrument for promoting its socio-economic objectives. The government budget also refers to the income, expenditures and sources of borrowings of the national government that are used to achieve national objectives, strategies and programs.

In developing countries like the Philippines, gaps between the rich and the poor are insurmountable. Thus, distribution of income and wealth is a serious problem. The distribution function might have serious implications for tax and expenditure policies. Recently, a report came out saying that the Department of Finance (DOF) planned to jack up the sales tax or value added tax (VAT) to 15 percent from the current level of 12 percent to raise much-needed revenue to plug the country’s ballooning budget deficit which hit a record P298.5 billion last year (Agcaoili 2010).

The report makes the fiscal debates even more heated as the issue of stability, another function of fiscal policy, is now the subject of concern. Often, government resorts to increasing taxes to have the means of public spending or avoid budget deficit. But it is known to many the myriad tradeoffs it can create.

People often hear in the news the fiscal plans created by government all in the name of “development,” another function of fiscal policy. Perhaps, this word is the most overused, if not abused, word in the political arena.

Development is multi-faceted. The word itself is nice to the ear. But it is a “very expensive commodity” in the words of Professor Briones. In order to translate development into reality, financing is, of course, needed. In harmony with other measures, fiscal policies are expected to generate resources in order to finance development activities (Briones 1983:55). In loan-dependent countries like the Philippines, generating resources means borrowing more and paying even more.

Over one third of our national budget goes to debt servicing. With the widening fiscal deficit, the national government’s debt now amounts to P4.42 trillion, accounting for more than half of its GDP and more than three times the government revenues if creditors were to call the debts in. The Philippines relies heavily on domestic and foreign borrowings to bridge its fiscal gap, which is expected to hit a record P325 billion this year (abs-cbnNEWScom).

The Challenging Economic Environment

Borrow more. Tax more. Pay more. It is a vicious cycle. It is without a doubt that the Philippines, the then mighty tiger in Asia, has transformed into a desperate pussycat roared by the giant financial institutions to which we are heavily indebted. The Filipino people become victims of immoral and debilitating conditionalities imposed by the IMF and the international financial oligarchy.

The economic situation becomes even more difficult as the world is facing what many economists describe as the worst economic crisis in history. The credit crisis in the US has accelerated the rate of financial meltdown all over the world, making the international lending institutions more eager than ever to force heavily indebted countries like the Philippines to extract a pound of flesh from their people. The national government’s total indebtedness has ballooned as a result of sudden and sharp currency depreciation during this critical time of global economic uncertainties.

In response to minimizing the impact of the global economic downturn, the Philippine government embarks on measures aimed at stimulating positive performance in all sectors of society. Former Socioeconomic Sec. Ralph G. Recto, for example, proposed stimulus package intended to keep the economy afloat. As a consequence, Economic Resiliency Plan (ERP) was put in place to supposedly manage to sustain economic growth by fiscal policy adjustments alongside the implementation of pump-priming programs and vital projects and activities.

The former NEDA Chief simply argues that the government intends to battle the present crisis by increasing spending through what he calls stimulus package-a fiscal and monetary strategy that is very Keynesian in nature. The ERP basically entails “ensuring resources through better revenue collection; enhancement of cash liquidity, access to credit and low interest rates; and more effective spending. It seeks to ensure stable growth, save and create jobs, provide assistance to the most vulnerable sectors, ensure low and stable prices, and improve competitiveness in preparation for the global economic rebound” (Recto 2009).

This stimulus package, however, is a mere pain reliever. It doesn’t cure the cancer, which is the crisis itself. A major surgery operation, therefore, is needed.

Think out of the Box: A Fiscal Strategy for the General welfare

“There’s life after the IMF.”

These are the words of then President Nestor Kirchner of Argentina when he defied the predatory financial institutions that imposed belt-tightening measures on his people.

The newly elected Philippine President Noynoy Aquino must do the same. He must have the courage to disassociate himself from the deceptive legacy of “honor all debts” policy of his mother. The traditional government action plan for debt management such as bond exchanges, maximizing the use of ODA, guarantees for GOCCs, and more borrowings, will not create lasting economic growth.

The Philippines, as an independent nation, with all dignity and courage, must therefore declare a moratorium on foreign debt payments. This will allow our country enough time to rebuild and expand our productive physical economy.

Through this fiscal strategy, the country can channel huge amount of its annual budget, instead to debt servicing, towards effective educational system, efficient healthcare system, and sustainable scientific research centers focused on food production, health maintenance, and industry. Consequently, this will encourage real investment into agro-industrial and manufacturing sectors and ensure a genuine path towards development.

Focus on Intrinsic Value

INTRODUCTION

The volume of research in the field of Behavioural Finance has grown over the recent years. The field merges the concepts of finance, economics and psychology to understand the human behaviour in the financial markets, to form winning investment strategies.

THE CONCEPT OF BEHAVIOURAL FINANCE

Behavioural finance is the study of the influence of psychology on the behaviour of financial practitioners and the subsequent effect on markets. Principal objective of an investment is to make money. We usually assume that investors always act in a manner that maximizes their return rationally. The Efficient Market Hypothesis (EMH), the central proposition of finance for the last thirty five years rests on assumption of rationality. But it has been proved that people are ruled as much by emotion as by cold logic and selfishness. While the emotions such as fear and greed often play an important role in poor decisions, there are other causes like cognitive biases, heuristics (shortcuts) that take investors to incorrectly analyse new information about a stock or currency and thus overreact or under react. Behavioural Finance is the study of how these mental errors and emotions can cause stocks or currency to be overvalued or undervalued, and to create investment strategies that gives a winning edge over the others investors.

I would like to bring out the behaviour pattern of a rational investor. This rational investor is assumed to act rationally in following ways:

o Makes decisions to maximize the expected utility.

o Fully informed with unbiased information.

o Absence of any distortion of judgement based on emotions.

It is to be kept in mind that risk resides not only in the price movements of dollars, gold, oil, commodities, companies and bonds. It also lurks inside us – in the way we misinterpret information, fool ourselves into thinking we know more than we do, and overreact to market swings. Information is useless if we misinterpret it or let emotions sway our judgement. Human beings are irrational about investing. Correct behaviour patterns are absolutely essential to successful investing – so to be financially successful one has to overcome these tendencies. if we can recognise these destructive urges, we can avoid them. Behavioural Finance combines the disciplines of economics and psychology specifically to study this phenomenon.

THE CONCEPT OF BUBBLES IN STOCK MARKET

A speculative bubble occurs when actions by market participants’ results in stock prices to deviate from their fundamental valuation over a prolonged period of time. Speculative bubbles are difficult to explain by rational trading behaviour, and theories have been put forward to explain market psychology through behavioural finance1. They propose that when significant proportion of trading activity in the market is characterized by positive feedback behaviour, it may result in asset prices to shift away from their fundamental valuation. This price deviation encourages rational investors to trade in the same direction.

Speculative trades are based upon investors’ private information held today, and are designed to provide investors with higher returns in the next period when that private information is fully revealed to the market. This implies a positive correlation in returns as market incorporate the information into prices. Trades due to portfolio rebalancing, or hedging, is not information based, and occurs when a trader may increase (or decrease) his stock holding by buying (or selling) a portion of his stock holding. This will be accomplished by increasing (or decreasing) the stock price to induce the opposite side of the trade.

FOCUS ON INTRINSIC VALUE

What are the implications for corporate managers? It is believed that such market deviations make it even more important for the executives of a company to understand the intrinsic value of its shares. This knowledge allows it to exploit any deviations, if and when they occur, to time the implementation of strategic decisions more successfully. Here are some examples of how corporate managers can take advantage of market deviations:

o Issuing additional share capital when the stock market attaches too high a value to the company’s shares relative to their intrinsic value.

o Repurchasing shares when the market under-prices them relative to their intrinsic value.

o Paying for acquisitions with shares instead of cash when the market overprices them relative to their intrinsic value.

Two things must be kept in mind as regards this aspect of market deviations.

Firstly, these decisions must be grounded in a strong business strategy driven by the goal of creating shareholder value.

Secondly, managers should be cautious of analyses claiming to highlight market deviations. Furthermore, the deviations should be significant in both size and duration. Provided that a company’s share price eventually returns to its intrinsic value in the long run, managers would benefit from using a discounted-cash-flow approach for strategic decisions.

It can thus be summarized that for strategic business decisions, the evidence strongly suggests that the market reflects intrinsic value.

INVESTING IRRATIONALITIES

Often turbulence in the market isn’t linked to any perceivable event but to investor psychology. A fair amount of portfolio losses can be traced back to investor choices and reasons for making them. I would like to point out some of the ways by which investors unthinkingly inflict problems on themselves :

Herding

This is a cardinal sin in investing and this tendency to follow the crowd and depend on the direction of others is exactly how problems in the stock market arise. There are two actions that are caused by herd mentality:

o Panic buying

o Panic selling

Holding Out for a rare treat

Some investors, praying for a reversal for their stocks, hold onto them, other investors, settling for limited profit, sell stock that has great long-term potential. One of the big ironies of the investing world is that most investors are risk averse when chasing gains but become risk lovers when trying to avoid a loss.

If we are shifting our non-risk capital into high-risk investments, we are contradicting every rule of prudence to which the stock market ascribes and asking for further problems.

ISSUES

One of the most important issues in Behavioural Finance is whether the assumptions of investor rationality are realistic or not.

The concept can be explained with the help of an example. Let’s assume that Mr. X invests and manages his portfolio in an efficient market. Here only seconds are available for a response to the news. There are a great number of factors that affect the decision of Mr. X. Further, these factors can affect each other. How can Mr. X draw the right judgements when the information is updated very frequently? Probably Mr. X works on a computer, through out the day, on which a utility function program is installed for his work. Every decision Mr. X is based on the calculation given by his computer. As soon as the portfolio is rebalanced, the computers utility function program analyses new alternatives. This process goes on and on over the course of the day. Obviously, Mr X does not show any joy, when he wins and no panic when he looses. Can a human brain behave like this? We know that a human brain can master only seven pieces of information at any one time.

So, how could one possibly absorb all the relevant information and process it correctly? People use simplifying heuristics (shortcuts) in order to control the complexity of information received. Psychological research has shown that the human brain often uses shortcuts to solve complex problems. These heuristics are rules or strategies for information processing, which help to find a quick, but not necessary optimal, solution. Once the information is simplified to manageable level, people use judgement heuristics. These shortcuts are needed to resolve the decision making as quickly as possible. Heuristics are also used to arrive at a quick judgement, they can, however, also systematically distort judgement in certain situations.

SIMPLIFICATION BIAS

The first step in reducing complexity is to simplify the decision. However it also adds the risk of arriving at a non-rational conclusion, unless one is careful.

MENTAL ACCOUNTING

People focus on one account (say purchase of share x) in particular when weighing things, relationship with other commitments or accounts (say purchase of share y) are usually ignored. I would like to explain this with the help of an illustration. For instance, Company A produces bathing costumes, and company B produces raincoats. Both companies are new, extremely efficient and innovating, so that purchasing shares in these companies would be a profitable proposition. A financial gain, however depends to a large extent on the whether in both cases, Company A will produce huge profits if the weather is fine, while Company B will make a loss, even though this is kept to a minimum, thanks to its efficient management. The situation is reversed in the case of bad weather. With mental accounting, either investment is risky when seen in isolation. But if we take into account the mutual effect of the uncertainty factor, i.e. the weather, then a combination of both shares become a lucrative, and at the same time secure investment.

AVAILABILITY CONSTRAINT

Not everybody has same degree of information. Some people prefer to see business news on CNBC TV 18, NDTV PROFIT. But others may like to see the serials on STAR PLUS. Obviously the first one may have more information, as compared to second.

REPRESENTATIVENESS

This is one of the mental shortcuts that make it hard for investors to correctly analyse new information. It helps the brain organise and quickly process large stock of data, but can cause investors to overreact to old information. For example, if a company is repeatedly giving losses, investors will become disillusioned with this past data, and thus may overreact to past information by ignoring valid signs of recovery. Thus, the stock of the company is undervalued because of this bias.

CHLALLENGES

Under the paradigm of traditional financial economics, decision makers are considered to be rational and utility maximizing. The assumption of rational expectations is simply an assumption – an assumption that could turn out not to be true.

Behavioural Finance has the potential to be a valuable supplement to the traditional financial theories in making investment decisions. The following fundamentals of behavioural finance give us a glimpse of the pitfalls to be avoided. These are the challenges which need to be overcome and addressed.

1. Hubris hypothesis: it is the tendency to be over optimistic. It results from psychological biases. The investor gets swayed by the momentum generated in the markets in recent past.

2. Sheep theory: it is a phenomenon where all the investors are running in the same direction. They follow the herd – not voluntarily, but to avoid being trampled.

3. Loss aversion: it says that investors take more risk when threatened with a loss. Thus mental penalty associated with a given loss is greater than the mental reward from a gain of the same size.

4. Anchoring: this causes investors to under react to new information. This can lead to investors to expect a company’s earning to be in line with historical trends, leading to possible under reaction to trend changes.

5. Framing: this states that the way people behave depends on their way decision problems are framed. Even the same problem framed in different ways can cause people to make different choices.

6. Overconfidence: this is what leads people to think that they know more than they do. It leads investors to overestimate their predictive skills and believe they can time the market.

RELEVANCE TO INDIAN STOCK MARKETS

Behavioural finance holds definite clues and appears apt in the current IPO craze as regards Indian markets are concerned. The herd mentality is evident in the scramble for shares. As the positive information of excess subscriptions comes, more investors enter the bandwagon. When Prices of the stocks start soaring, everyone one is thinking of the same thing: I am going to sell on listing and book the profits. Can money making be so simple? Is life and the financial markets so predictable? One will see investors selling the stocks as soon as they get the allotments. Herd mentality will be at work with people trying to sell faster than the neighbour, thus eroding stock values at a faster rate. Greed thus becomes the graveyard. One needs to understand that there are no shortcuts to earning money. One has to work hard and have patience.

It is believed that perfect application of Behavioural finance can make an Indian investor successful, making fewer mistakes. Even if we learn to identify some common psychological and cognitive errors that plague even the wisest investment professional, it may be enough. To put it in Simple words, economic theory starts with a flawed basic premise that the investor is a rational being who will always act to maximise his financial gain. Yet, we are not rational beings, we are human beings.

In stock markets, behavioural finance can help explain situations such as why we hold on to stocks that are crashing, foolishly sell stocks that are rising, ridiculously overvalue stocks, jump in late and never find our right price to buy and sell stocks.

Let’s take the example of the recent discovery of gas by Reliance industries. The stock starts spurting as everyone starts buying on this news. Newspapers start flashing stories as to the size of such a discovery.

But let us analyse the situation without becoming a prey to mental heuristics. Gas has been discovered but the same needs to be drilled which takes a lot of time and money. What is the quality of the gas? How many wells would be needed for drilling? How much time will it take? How much money would be required and what are the plans to finance the same? How easy it is going to be to extract the same? These are all important and pertinent questions. In this time lag there are so many uncertainties the company will have to go through, before the profits are reaped. However, analysts have started predicting the future profitability of Reliance and on such hopes investors start buying the stock at rising prices.

This is how mental heuristics work when the brain takes a shortcut in processing information and does not process the full information and its implications. Thus behavioural finance has a pivotal role to play in Indian Capital market.

CONCLUSION

Knowing the heuristics shall help the investors to which they are susceptible and this will help them in neutralizing to some extent the distortions in the perception and assimilation of information. This will in turn, help the investor to take a rational decision and get a cutting edge over the other not-so-rational investors.

More research on behavioural finance should take place not only in asset pricing but also in areas like project appraisal & investment decisions and other areas of corporate finance, so that managers can avoid the decision traps. Psychology and irrational behaviour matter on financial markets. Behavioural finance is relevant in many ways. It educates investors about how to avoid biases, designing long and short term strategies to exploit biases; and being aware that decision-makers in financial markets are human beings with biases. We also need to realize that an implicit assumption of behavioural finance is that their findings at individual level are scalable to market level.

Understanding The Basic Finance Options

When it comes to getting your finances in order, it is a good idea to understand a little about all the tools that you have at your disposal. Here are a few reminders of the several different ways you can gather support and information to help you manage your finances.

No matter what our goals happen to be, most of us find ourselves in need of good sound finance advice from time to time. We can find all sorts of qualified finance advisers around us. Our local bank is usually willing to help us understand the workings of saving and investing, and without charging anything for going over the basics. Many communities have non-profit organizations that help with preparing budgets and providing counseling when persons are in need of a few tips on breaking bad financial habits.

Counseling is also available to help you meet long term financial goals as well. As an example, if one of your goals is to finance college tuition for your children, a qualified counselor can help you set up a savings program that will allow you to set aside an equitable amount on a regular basis in some sort of interest bearing account. By using a finance calculator to layout your monthly budget, and make sure your budget is realistic, you can begin to make headway toward building that college fund.

Of course, it may be that you need some guidance in seeking a finance loans to purchase a home or start a business. You will want to speak with more than one finance lender, so that you can do some comparison shopping on finance rates, monthly repayment terms, and how much of your monthly payment will be applied to your principle. You also want to know if there are any penalties for paying off the loan early, or if there are any incentives that would make it worth your while to retire the debt earlier than planned.

Finance equity can also be a topic where you would want to seek some expert advice before making a move. Understanding just exactly how much equity you current have in your property can make all the difference in evaluating your overall financial health. This is especially true if you are considering the sale of a portion of your properties. Without a reasonable amount of equity accrued, you may find it advantageous to hold on to the properties for a little while longer.

If you want to learn to handle more of your finances on your own, there are probably several avenues in your community where you can take a finance course or two. Your local community college may have courses that can be taken in the evenings or on weekends. Credit associations often have short term courses that are geared toward particular areas of financial management. Check in the phone book and with your local chamber of commerce to find out what opportunities are coming up.

Record keeping is also important to your fiscal health. If you have a home computer, you can avail yourself of finance software. Some computers come with basic finance tracking packages already loaded into the hard drive. If you need something a little more robust, there are a number of different software programs on the market today. Often, you can download a trial version of any finance software you are interested in and see if the package will do everything you need it to do.

With so many tools at your command, you can arrange your finances and begin to set goals that will make life much easier for you in the years to come.

The Global Economic Meltdown and You

Most people would agree that the news media likes crisis. They tend to overstate and inflame, not so much to share information so much as to sell more advertising or some more of their publications. Media hype creates a buzz that in turn sells more media which is precisely the goal of the publisher or the organization that owns the broadcast stations. For this reason many people lose trust in what the media is reporting, and take these stories less than seriously.

But to underestimate the implications of the global economic meltdown because one thinks it is simply media hype would be a grave error. The economic troubles and pressures facing not just our nation but the entire world are serious and very real. Regardless of your social status or station in life, this economic meltdown will have a direct effect upon you and your family both now and well into the future. There’ll be potential impact to your job and income, as well as to your accumulated wealth, your ability to create new wealth, and even your ability to maintain the wealth that you have already gathered.

If you’re not prepared for the economic meltdown, now is the time to start. There are many ways to do this, but the first and arguably the most logical is to take a detailed assessment of your life as it exists today. First assess your finances, particularly your income, your expenses, your accumulated wealth, as well as your goals and objectives for the future. You need to understand where you’re trying to go, and then assess the risks that you will face in achieving those goals.

Experts generally recommend that you start with the most critical areas first. If your income is at risk-and if you work for any company or any person, it is-you first need to take steps to secure your income in case the worst happens. If your company goes out of business, must release you, or even if they reduce your rate of pay, you need to have a contingency plan in place to deal with the crisis.

As a hedge against potential employment disaster, many people are turning to self-employment in order to create the kind of security and income that they need to survive anything that the economy throws at them down the road. Very often self-employment takes the form of a home-based business that leverages the Internet for direct marketing.

There many opportunities out there that provide this type of security to an individual, and require very little capital investment or prior experience. It simply takes a desire to move forward and a commitment to do so. As the economic meltdown worsens, it’s something you should probably consider.

What Do You Mean by Economics

The current affairs presenter on TV solemnly introduced the next contributor to the programme. “So-and-so is an economist”, he said. All the talk these days is about economists and the economy.

In its different forms, economics, economist, economy, etc., the word is being bandied about all the time, it seems. It’s a very clever trick. Keep on using the word without explaining, or even considering, what it means and everybody gets bamboozled into thinking economics must be important.

Not only does everybody think economics must be important, they then get to thinking that economists are important. Worse still, the general population begins to think that economists are the most important people around. What is really bad is that the idea gets promoted that they are the only ones who will get us out of our difficulties.

Economists have become a new priesthood a band of putative miracle workers. Even though we don’t know much about it all, we’ve nowhere else to pin our hopes.

My mother used to speak about ‘economical’ some fifty years ago. She wasn’t afraid of the word. Although she had no paper qualifications in the subject, she knew what the word meant.

She also made sure that we children knew what the word meant.

We didn’t leave the soap in the water after we had finished washing our hands. It wasted the soap. We didn’t help ourselves to more food than we needed. Indeed, if we were in danger of wasting food, she would remind us of some little boy in Africa or India who would be glad of it.

That was a clever way she had of making us use things with imagination. Whatever we had got – money, food, our books and toys – were not just things for us to have, but also to share and use for the benefit for other people.

It was right for us to look after things, keep them safe and not leave them lying around as though nobody owned them. But it was all right also at times to lend stuff or give it away. If we ever borrowed, we had to look after it and be sure to return it at the proper time.

That little African boy was, of course, a myth. My mother had never seen him and didn’t know his name, so he was a myth. But a lot of people think of myth just as something that isn’t true. I now know that boys like this and their families do exist, so the myth is only too true! Somebody once said “Myth is truth seen at high speed”. I see what they mean.

My mother’s mythical African boy has formed such an important part of my education in economics. In the current world economic situation, people are still being told a lot of myths. This is so that we shall all understand things better. But it’s important that we learn to distinguish the ‘truth seen at high speed’ kind of myth from outrageously false stories.

Have you heard the one about the top bankers who need to be paid several millions a year in salary or else they will go and work somewhere else? It gets better – they also need to be paid a huge bonus on top of their salary, even when their company makes a loss. My mother would certainly have seen through that, and so do I.

What You Need to Know About Emerging Markets

Contrary to the belief of many HR people, Numbers Matter More Than Words. You may disagree but that’s the reality: in our today world, numbers speak louder than words. Just take a closer look at the current economic situation and you will find evidence of that.

At times where some governments are struggling with serious budget issues, investors and citizens are more interested in the numbers rather than beautiful rhetoric. And guess what? It’s the same within your company! Particularly in the C-suite room where they likes metrics.

–> Just because you work in the HR field doesn’t give you the excuse to be bad at Economics.

In order to be taken seriously, you have to see the world through the Economic and Financial Lens. Remember: Finance is the King anywhere on earth and the most important player on board. People who don’t understand Economics/Finance are people who don’t understand how the world and their companies work. And of course, you don’t want to be part of this category! As a credible HR Professional, your goal is to be seen as an effective Business Partner. This means being capable of talking numbers and economy confidently with your bosses and anyone else.

If you feel really uncomfortable with numbers and don’t want to spend a lot of time learning news terms and formulas, this article is a good starting point to enhance your understanding of our complex world. Written in a concise manner and with a minimum of economics jargon, it will give you the basics insights of economics that really matter – those that will help you understand why Emerging Markets are going to be more and more important in your day-to-day business activities. Here are what you need to know:

1. The term “Emerging Markets” was created in 1983 by Antoine van Agtmael – an international investment manager – to dispel the negative connotations associated with the previous term “Third Word”.

2. Emerging markets account for 2/3 of the world’s population.

3. In 20 years the economies of these countries will surpass the combined economies of the developed countries.

4. BRICS stands for the fast growing economies of Brazil, Russia, India, China and South Africa. The acronym BRIC was first coined by Goldman Sachs economist Jim O’Neill in 2001 and in 2011 South Africa was officially admitted to the prestigious club.

5. The Next Eleven (N-11) is a group of emerging countries with the potential to rival the G8. This group includes Bangladesh, Egypt, Indonesia, Iran, Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey and Vietnam.

6. Goldman Sachs believe the N-11 countries combines may become larger than many of the G8 economies by 2050.

7. Over the past decade, emerging Asia’ real GDP growth rate jumped to an annual average of 7.9%, following by sub-Saharan Africa’s 5,7% and Latin America’s 3,3%

8. Africa is now one of the world’s fastest-growing regions. Over the ten years, six of the world’s ten fastest-growing economies were in sub-Saharan Africa.

9. Although Africa’s economy accounts for only 2% of world output, it will grow at average annual rate of 7% over the next 20 years (faster than China’s) according to Standard Chartered.

10. Emerging markets can be divided into three categories: 1. countries rich in human resources (China, India, Philippines), 2. countries rich in mineral (countries in Africa, Latin America or Russia), and 3. countries rich in financial resource (countries in the Middle-East).

11. The world’s top ten emerging markets according to their stock market value and their national debt are: Taiwan, Indonesia, Mexico, Poland, Brazil, India, Turkey, South Korea, China and Russia.

Econometrics in Finance

Econometrics refers to developing quantitative methods to analyze economic principles. Theoretical econometrics uses statistical properties while applied econometrics usually applies econometric methods to the various theories. Finance domain is increasingly using the technique like risk management, portfolio management etc.

Econometrics is used in finance to evaluate quantitative problems and uses various techniques like financial models, volatility estimation, capital asset pricing, risk adjusted returns etc. Financial econometrics is viewed as a merger of economics, finance, statistics and applied mathematics. For the various issues in financial world, economics renders theoretical foundation while statistics and applied mathematics using quantitative techniques are used to solve quantitatively. The vast amount of data generated in financial markets on asset returns, volatility usually requires study over a period of time using techniques like time series. Econometrics is widely used for derivative products like options, futures etc.

Regression analysis is one of the primary methods. It usually involves modeling and analyzing various variables to establish a relationship between dependent variable and many independent variables. This technique is useful to understand the changes in the dependent variable to any changes in independent variable. Methods of Moments, Bayesian methods, Generalized Method of Moment etc are other important methods used in econometrics.

The general steps involved in developing an econometric model are:

• Understanding the problem – It involves formulation of a theoretical model to relate two or more variables.

• Collecting data – It involves accumulating relevant data from public domain like Reuters or any published information and also from surveys.

• Selection of method – This step involves choosing an appropriate estimation method like single or multiple equation technique.

• Statistical evaluation – It involves framing assumptions for estimating parameters of the model and analyzing the aptness of the estimates in relation to the data.

• Evaluating the model – The model is then assessed from theoretical perspective.

• Implementation of the model – the model is then used for the identified issue and also for making forecasts. The step also results in courses of action needed.

Econometrics is being widely used in fields including finance and knowledge of its various techniques helps investors manage their portfolios well.

Future Careers In Finance

Those who are good with numbers may have future careers in finance. This is because most businesses need talented individuals who can manage and at the same time administer money that was entrusted to them in order to post a profit.

But can anyone do it? The answer really depends on the person. In order to get a head start, you need to get quality education. After secondary school, you need to go to college and graduate with a bachelor’s degree in accounting, economics, finance, math or statistics to learn the fundamentals used in the corporate world.

When you graduate from college, you can apply for work in a bank, in a credit agency, insurance, sales or securities.

For those who choose to work in a bank, they will often have to start out as a trainee then be promoted to either approving loans or selling financial services to clients. Some examples of these include bank transfers to financial management.

Credit agencies just like banks offer similar services to clients. The only difference is that their policies with regards to lending are more flexible thus making them friendlier to potential clients.

With healthcare being so expensive, people need insurance coverage and after getting your license, you can go out there and sell these to potential clients.

How can sales jumpstart your career in the world of finance? Simply because people buy things and if these cost a lot of money, someone with your skills can help them plan how they can pay for it. Examples of these include a new home or even a car.

Securities is another field you can get into because the purchase and sale of bonds and stocks increases the value of the client more than keeping money deposited in the bank.

But in order for people to excel in this field, they have to overcome another hurdle and that is to complete graduate school. Why? Because the market is very competitive and there are always new trends and methodologies being discovered that makes you a better professional.

A lot of experts say that a future career in finance also requires a few personal skills. The most important is “people skills” because you will be working with colleagues and dealing with different clients.

You will have to be resilient because when you pitch a sale and things don’t work out how you planned, you have pick yourself up again and be optimistic about the next client that comes your way.

It will also be challenging especially when you will need to work beyond regular hours on occasion to meet the deadline or have a night out with a client. This means you have to be committed if you plan to stick to this career in the long term.

The financial services sector has been growing even before the attacks of 9/11 and will continue to do so in the foreseeable future. Again this path is not meant for everyone but if you are good with numbers and are a people person, you may just have what it takes to excel in this profession.

If you are still unsure, look at your grades in math and talk with your guidance counselor. This person will be able to point you in the right direction then it is up to you whether or not you believe that you have a future career in finance.

Tips on How You Can Excel

If you like working with numbers and are fascinated with what you can do with numbers, then you should consider a career in finance. Nowadays many businesses need individuals who can manage money and get profitable returns. It is not as easy as it sounds because you are expected to go through secondary school first, and then if your grades are good, you can proceed to college and acquire a degree in economics, finance, accounting, math, or even statistics. There are many options available to you where you can apply for a job.

The banking industry is one of the most popular options, with positions like corporate banking, corporate finance, financial planning, investment planning or money management you cannot go wrong. There is a growing need for people who are in the finance field. So it is a good idea to expand your horizons by constantly reading and keeping abreast of any changes that may arise in the business world.

If you get into corporate finance, you will probably work for a corporation and you will be charged with the duty of sourcing money to develop the company, make acquisitions and ensure that the company’s future is secured. You may start out as a financial officer. A career in financial planning would be mainly concerned with strategizing the financial future of the corporation. You have to understand the way the world of investments, taxes and estate planning works.

You also have the option of being a consultant and helping individuals plan their income for the future, like planning how they pay their kids college fees or retirement. If you go for a career in investment banking, you will be in charge of helping investors purchase, manage or trade financial assets.