- Industry: Economy; Printing & publishing
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Someone who is insensitive to risk. Risk-neutral investors are indifferent between an investment with a certain outcome and a risky investment with the same expected returns but an uncertain outcome. Such people are few and far between.
Industry:Economy
The extra return that investors require to hold a risky asset instead of a risk-free one; the difference between the expected returns from a risky investment and the risk-free rate. (See equity risk premium. )
Industry:Economy
Someone who cannot get enough risk. ¬Risk-seeking investors prefer an investment with an uncertain outcome to one with the same expected returns and certainty that it will deliver them.
Industry:Economy
The rate of return earned on a risk-free asset. This is a crucial component of modern portfolio theory, which assumes the existence of both risky and risk-free assets. The risk-free asset is usually assumed to be a government bond, and the risk-free rate is the yield on that bond, although in fact even a Treasury is not entirely without risk. In modern portfolio theory, the risk-free rate is lower than the expected return on the risky asset, because the issuer of the risky asset has to offer risk averse investors the expectation of a higher return to persuade them to forgo the risk-free asset.
Industry:Economy
Protection from the rough seas of regulation. Laws and regulations often include a safe harbor clause that sets out the circumstances in which otherwise regulated firms or individuals can do something without regulatory oversight or interference.
Industry:Economy
Settling for what is good enough, rather than the best that is possible. This may occur in any situation in which decision makers are trying to pursue more than one goal at a time. Classical economics and Neo-classical economics assume that individuals, firms and governments try to achieve the optimum, best possible outcome from their decisions. Satisficing assumes they decide for each goal a level of achievement that would be good enough and try to find a way to achieve all of these sub-optimal goals at once. This approach to decision making is commonplace in behavioral economics. It can be regarded as a realist’s theory of how decisions are taken. The concept was invented by Herbert Simon (1916-2001), a Nobel ¬prize-winning economist, in his book, Models of Man, in 1957.
Industry:Economy
Any income that is not spent. Ultimately, savings are the source of investment in an economy, although domestic savings may be supplemented by capital from foreign savers or themselves be invested abroad. In an economic sense, savings include purchases of shares or other financial securities. However, many official measures of a country’s savings ratio--total savings expressed as a percentage of total income--leave out such financial transactions. At times when the demand for financial securities is unusually high, this can give a misleading impression of how much saving is taking place. How much individuals save varies significantly among different age groups (see life-cycle hypothesis) and nationalities. Everywhere, people of all ages save more as their income rises. The supply of savings rises when interest rates rise; a rise in interest rates causes demand for funds to invest to fall; a rise in demand for investment funds may cause interest rates, and thus the cost of capital, to rise. The level of savings is also influenced by changes in wealth (see wealth effect) and by taxation policies.
Industry:Economy
Supply creates its own demand. So argued a French economist, Jean-Baptiste Say (1767–1832), and many classical and neo-classical economists since. Keynes argued against Say, making the case for the use of fiscal policy to boost demand if there is not enough of it to produce full employment.
Industry:Economy
The ease with which the supply of an economic product or process can be expanded to meet increased demand. Recent technological advances have led some economists to talk about the growing importance of instant scalability. For example, once a piece of software has been written it can be made available in an instant over the Internet to unlimited numbers of users for almost no cost. This potentially allows a new product to enter and win market share far more quickly than ever before, intensifying competition and perhaps accelerating the process of creative destruction (see Schumpeter).
Industry:Economy
Supplies of the factors of production are not unlimited. This is why choices have to be made about how best to use them, which is where economics comes in. Market forces operating through the price mechanism usually offer the most efficient way to allocate scarce resources, with government planning playing at most a minor role. Scarcity does not imply poverty. In economic terms, it means simply that needs and wants exceed the resources available to meet them, which is as common in rich countries as in poor ones.
Industry:Economy
