July 12, 2010

In Soviet Russia, Finance Number-Crunches You!

I think every self-titled economist should get a finance degree.

No, wait, here me out. Look, while "normal" economists do a great deal of econometric work, there's something to be said about the finance major who bolstered his degree with econ, and the econ major who supplanted her degree with finance. The two are strongly tied together, theoretically and in principle.

For example, introductory finance courses will have you look at the present value (PV) of a stream of cash flows. This exact same skill is presented to you in intermediate microeconomics, alongside such models as Stackleberg, Bertrand, and the Cobb-Douglas production function. Calculating beta values is a matter of understanding relative performances and supply-demand tensions that yield valuations. Essentially, it's an elasticity value. While the theoretical side of that explanation is all economic, the numbers and the math of it is all finance.

So why am I telling you that an econ major should pursue finance instead of, say, operations? Cobb-Douglas is, after all, a production function, and operations is all about Right Time, Right Place, Right Price. It seems like a match made in Nerd Heaven.

Well, it is. And that's something of the problem. Ops and econ guys will forever argue the finer points of each others' specialties. Ops people are all about the practicalities, while econ people can get too caught up in the beauty of their models. Finance is nice because it gives econ people the skills and tools to assign harder numbers to their assertions. It also aids in understanding valuation, understanding the logical extensions of economics, and to gain a more full understanding of the models in economics.

In turn, understanding economics gives finance majors a better theoretical basis for the hard numbers. It can, for some, provide the "why are these steps in this order" that finance students ask, especially early on. Finally, knowing econ models enriches a financier's understanding of her subject, as well. By being able to see the past, present, and future of a finance problem (relatively speaking: the past is the genesis of the theory, the present is the quandrary at hand, and the future is the application of numbers to the process) a finance major distinguishes herself from her colleagues by being able to speak intelligently and eloquently about the finer points of finance.

Finance and econ are like twin strands in a length of rope. As each lays over the other, the resulting cord is stronger. You are that cord. Knowing and understanding both well will give you greater strength than that of your colleagues.

July 10, 2010

Top-Down Writing

I was reading the newspaper today and realized something: most people don't know how to really read a newspaper. So here are some tips:

Newspapers, by convention, utilize something called the "inverted pyramid" in the structure of the articles. Now, most of us have at least heard of the reporter's checklist, which are the seven questions journalists strive to answer in a news report column: who, what, when, where, why, how, and so what. Reporters, when writing front-page news, will cram all of the details into the first paragraph or two of the article, oftentimes within the first four or five sentences.

So what does this mean exactly? Well, when you're reading a newspaper (say, for example, The Wall Street Journal) and an article about, oh, tax fraud by a tech company shows up, and you just aren't interested in taxes, fraud, technology, or any combination thereof, you can read the first three paragraphs or so and move on. In those first three paragraphs (or like six sentences) you'll have gathered all of the pertinent information from the news report and moved on.

The other thing: headlines lie. Here's a good example from sports--"NBA star to help murder victim’s son" (from The Star on June 6, 2010). What does this mean? I see at least two wildly varying interpretations: either an NBA star is helping out the son of a murder victim....or he's going to help murder the son of some sort of victim. Sure, the former is more likely, but the second interpretation still exists. I can't tell you the number of times I've been duped into reading an article about ForEX minutiae by it having an intriguing title. Likewise, I've skipped articles pertinent to my (hopefully) future career due to their blasé-sounding headlines.

The point is: skim everything, but only read what you're interested in. Also, bear in mind: op-ed or feature articles will usually not be structured like this. Finally, remember to always read with a little cynicism; I've disagreed with The Journal a few times with respect to their predictions and assertions. Newspapers are still written by people, who have opinions and interpret the information they receive, so reading with a discerning eye will make you better informed in the long run.

My last tip for reading newspapers is to get the hard copy. Not only will this help our ailing news industry, but honestly? Skimming a newspaper is a great deal easier than skimming a seemingly neverending series of web links from article to article. After all, the most popular article on CNN.com is usually some human interest piece - how informed are you really after reading that?