ECON 103 Lecture Notes - Lecture 25: Time Preference, Discounting, Risk Neutral

• School: UMASS-Amherst
• Department: Economics
• Course: ECON 103
• Professor: Gerald Friedman

Document Summary

Why we care: financial markets are growing share of economy, even faster growing share of profits, and wages, cause of macroeconomic instability, linking points 1-3: potential area for fraud. Defer eating to get more corn in the future. We compare future and present by calculating present value : pvt = mt+1/(1+r, present value now (t) is the value next year (t+1) divided by a discount factor (1+your interest rate) Low value of r = care about the future. Asymmetric information fancy words for lying: gives you an advantage you know something they don"t know. It can be below 0% only if your savings would go away if left under the mattress. Risk: maybe your corn will grow, maybe it wont. If you know with certainty the probability of success (say ), then present value becomes expected value: weighted value of the two outcomes where is the weight.