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What is finance? The short answer to this question is finance is the science of acquiring funds, the art of making good investments, the science of minimizing risks and, ideally, the art of living with risk. In other words, finance is about understanding risk. The long answer is that finance is the science of managing and organizing the whole process of getting money to invest in businesses, saving it for the future, and delivering it when needed.
We know what finance is: Money and finance are one of the most important concepts in modern financial theory. It is the science of working out how to save money over time so that it can be invested later in businesses, generating both income and capital goods when needed. This definition has been updated many times through the history of finance. However, a brief glance at the history of modern financial theories will reveal that the core of modern monetary thinking has been shaped by the great French philosopher Malebranch and his pupil Say, who both independently formulated very different ideas concerning the role of money in economic activity and the motivation of individual investors.
Malebranch’s main contribution was to refine the standard economics of supply and demand economics, which he had begun to develop around 1825. For Malebranch, supply and demand were two fundamental forces that changed the economy through their effects on the individual agents involved in that economy. Say, on the one hand, saw economics as nuisances exercise based on individual self-interest that could be easily manipulated by the powerful groups of individuals called corporations. His concept of behavioral finance rested on the assumption that people acting in response to the same stimulus, which could be any asset, would drive the interest rates and other factors that would affect the balance of capital assets and liabilities. In this view, the goal of the planner or agent was to maximize the wealth of the individuals composing the association, which was viewed as the basis of modern economics. For Malebranch and Say, the goal of efficient utilization of the capital stock, both fixed and variable, was seen as the basis of modern wealth management.
The standard framework for the study of finance, which emerged from Malebranch and Say’s insights, was to be adapted by later economists with a focus on individual as well as institutional settings. A different approach to the study of economics was pioneered by J.D. Rose, who combined the concepts of individual investment behavior with institutional and political variables. The resulting framework, called endogenous economics, acknowledged the role of finance in the overall economic process and was greatly influenced by Malebranch and Say’s work. Today, this field still recognizes a role for economics in society even though most research and analysis now tend to speak about business-cycle issues, savings and investment behavior, financial institutions, and other such areas.
Modern academic theory regarding the study of how to understand and interpret financial instruments often makes use of models, both general and complex, to analyze and interpret the data. A wide range of instruments have been used over time to represent different aspects of the economic environment. The analysis and interpretation of financial instruments are heavily influenced by the types of instruments available, the nature of the markets where the instruments traded, the interest rates that they will be exchanged with, and the rules that govern their trading. All these factors can be analyzed using sophisticated models that make use of economic theory, financial services, and banking systems to provide a rich background for the understanding of financial instruments.
An additional area of great interest in regards to understanding what is finance is microfinance. Microfinance is rapidly growing in popularity due to high degree of accessibility and ease of access to credit, as well as its positive effects on the performance of the overall economy. In fact, some feel that microfinance is one of the forces that made possible the rise of the greenback as a viable alternative to the traditional US dollar.