Skill Farm’s Post

Albert Einstein is often quoted as saying, “The most powerful force in the Universe is compound interest.” He also referred to compound interest being the eighth wonder of the world. And just like his work on Relativity and Atomic Theory, compound interest just seems way over most people’s heads. We often dismiss interest as something that we have to pay on our credit cards and mortgages every month, or as the 20-cent payment our bank gives us for keeping our money in an account (yahoo!). But this couldn’t be further from the truth, compound interest is actually a very simple concept to understand, and relatively simple to calculate using the Rule of 72. Simply put, the Rule of 72 is a mathematical formula used to estimate the number of years it takes for an investment to double in value, given a fixed annual rate of return. The formula is: Approximate years to double = 72/Annual Rate of Return. Mind you, this isn’t exact, but it provides a quick and rough estimation to make compound interest a bit easier to deal with. Here's an example: If you have an investment with a 6% annual rate of return, you can estimate that it will take approximately 12 years for your money to double, calculated as: 72/6 = 12 years for your investment to double. So why is this important? Here’s some key points to consider: 1. Quick Estimation: The Rule of 72 allows investors to make a rough estimate of the potential growth of their investments without the need for complex calculations or financial tools. Many people can do the calculation in their head. 2. Decision Making: Investors can use the Rule of 72 to evaluate different investment options and compare the potential for growth. It helps them make quicker decisions about where to allocate their resources. 3. Understanding Compound Interest: The rule helps investors grasp the concept of compound interest. Compound interest occurs when the interest earned on an investment is reinvested, leading to exponential growth over time. The Rule of 72 highlights the impact of compounding on investment returns. 4. Risk Assessment: Investors can use the rule to assess the risk associated with different investment opportunities. For example, if an investment is expected to double in a relatively short period, it might be perceived as riskier than an investment with a longer doubling time. 5. Educational Tool: The Rule of 72 serves as an educational tool, especially for those who may not have a strong background in finance. It simplifies the understanding of the relationship between time, rate of return, and investment growth. Here's a bit of homework for you: Look at your current investments and bank accounts and use the Rule of 72 to calculate how long it's going to take that money to double and comment below! #financialeducation #financialindependence #financialliteracy #CompoundInterest #RuleOf72 #NewYear2024Resolutions #investors #investormindset #financialplanning

🧠 Food for thought - Behavioral Finance: Wishful Thinking & Cognitive Dissonance 📊 Balancing the 9 to 5 grind can be tiring, but I've been channeling my curiosity into courses from marketing and finance backgrounds to explore more! 📚 In my recent studies of 'Financial Markets' from Coursera, I stumbled upon two fascinating concepts that play a big role in financial decision-making: 1️⃣ Wishful Thinking Bias: Picture this – you've invested in a startup, and despite market indicators showing struggles, you're convinced it's destined for success. That's wishful thinking bias, where our desires cloud rational judgment. Example 1: Holding onto a plummeting crypto because you hope for a sudden surge. Example 2: Ignoring warning signs in a company's financial reports because you're emotionally attached to the stock. 2️⃣ Cognitive Dissonance: This one's a bit sneaky. It's the discomfort we feel when our beliefs clash with our actions. In finance, it often appears when we justify holding an underperforming investment. Example 1: You criticize a company's management publicly but keep holding their shares. Example 2: You invest in a "green" energy company while driving a gas-guzzling car. These biases remind us that even in the world of finance, our minds can play tricks on us. Awareness of these quirks can lead to more informed choices. PS - This course is thorough and is proving to be genuinely engaging for me. Guided by Robert Shiller, Professor of Economics at Yale University. He received the 2013 Nobel Prize in Economic Sciences, sharing it with Eugene Fama and Lars Peter Hansen. The three received the prize “for their empirical analysis of stock prices.” Have you encountered these biases in your financial journey? #BehavioralFinance #Investing #Coursera #FinancialMarkets #WishfulThinking #CognitiveDissonance

Orthodox economic models are just theories of social science just like other social sciences mostly explaining the phenemona after the event, and don’t have much predictive powers no matter how much mathematics is employed. Economics have a science envy and economists have been trying to pass it as a natural science since the 19th century, and thus especially since the 1970s econometrics and mathematical models rule supreme. Always had a problem with this as someone who studied physics and then economics as a student of history, politics and sociology with a ‘masters in finance’ and I am glad that this is now getting discussed and challenged widely. And, ‘behavioural economics’, the branch of economics that came along to explain all the differences (to the real world) away so that orthodox economics still ruled supreme, and even got awarded Nobels for saving us from this important discussion that would challenge a whole ‘belief system’ on which the current World System is built, only postponed the eventuality. So yes, volatility is not equal to risk (however convenient it might be to have a statistically quantifiable measure to have at hand), and all modern finance theory based on efficient markets hypothesis is exactly that: a theory.

"My criticism of academic economics is that the models built by economists basically treat market agents as robots. They make decisions according to defined rules, and the constructed models are labeled “rational models.”" I spent a lot of time reading Fabozzi's textbooks, so it's interesting here, a few decades later, to see his critique of "the system" in academic finance. I think even then there was an acknowledgement that people are not mathematical robots, and that the emotions of fear & greed have played a role since the first humans started trading valuable goods eons ago. In my corner of finance the "personal" factors often prevail, but, there are definitely numbers involved! #personalfinance #behavioraleconomics #investing

Compounding interest is an interesting concept for several reasons: 1. Exponential growth Compounding interest leads to exponential growth, which is a fascinating concept in mathematics. The growth rate accelerates over time, leading to a snowball effect that can be mesmerizing to observe. 2. Counterintuitive results Compounding interest often leads to results that defy intuition. For example, a small change in interest rates or time frames can lead to drastically different outcomes, making it a fascinating topic to explore. 3. Real-world implications Compounding interest has significant real-world implications, affecting personal finance, investing, and economic growth. Understanding compounding interest can help individuals make informed decisions about their financial lives. 4. Compound frequency The frequency of compounding interest can have a significant impact on the outcome. Daily compounding can lead to vastly different results than monthly or annually compounding, making it an interesting aspect to explore. 5. The Rule of 72 Compounding interest is closely related to the Rule of 72, which estimates how long it takes for an investment to double in value based on the interest rate. This rule has been widely used and is a fascinating example of the power of compounding interest. 6. Historical significance Compounding interest has played a significant role in shaping the world's economy and financial systems. Understanding its history and evolution can provide valuable insights into the world of finance. 7. Mathematical beauty The mathematics behind compounding interest are elegant and beautiful, involving concepts like exponential functions and geometric progressions. 8. Surprising applications Compounding interest has applications beyond finance, such as population growth, chemical reactions, and even biology, making it a fascinating topic to explore from different angles. Overall, compounding interest is an interesting concept because it combines mathematical elegance, real-world implications, and counterintuitive results, making it a fascinating topic to explore and understand. Hope you have a lovely day.

I both understand and don’t understand quantum theory but Nicole Fichera’s observations in this article make it more real for me ;) This is a great read!

Unlocking the secret of stock markets! SFI’s LMF Model, proposed by Doyne Farmer, Fabrizio Lillo, and Szabolc Mike, explains the “long memory” behavior in stock markets. A recent study using Japanese stock market data confirms the model’s predictions, showcasing quantifiable laws in #finance. Financial markets, akin to physics, follow precise models. Despite the influence of buy and sell orders on prices, the resulting deviation from market efficiency is relatively small on average. h Understanding the intricacies of long-memory in order arrival opens new avenues for exploring market dynamics.

Game theory is a theoretical framework for analyzing social situations among competing players It is the science of strategy, or at least the optimal decision-making of independent and competing actors in a strategic setting Game theory can be used to model real-world scenarios such as pricing competition and product releases, and predict their outcomes Some key features of game theory include: Players: The individuals or entities involved in the game. Strategies: The options available to each player. Payoffs: The outcomes or rewards associated with each combination of strategies. Equilibrium: A state where no player can improve their payoff by changing their strategy, given the strategies of the other players. Some examples of games studied in game theory include: Prisoner's Dilemma: A scenario where two individuals are arrested for a crime and must decide whether to cooperate with each other or betray each other to the police. Dictator Game: A scenario where one player is given a sum of money and must decide how much to share with another player. Game theory has many applications in economics, politics, and other fields. It can help companies make strategic decisions and predict the behavior of competitors Different types of game theory include cooperative/non-cooperative, zero-sum/non-zero-sum, and simultaneous/sequential The key pioneers of game theory were mathematician John von Neumann and economist Oskar Morgenstern in the 1940s, and mathematician John Nash made significant contributions in the 1950s