Optimal finance means optimal allocation of money across your life, regardless of when you earn it.
That’s part of it, but there’s also coordination between people (e.g., investors coming together to finance a capital-intensive business that no single person can afford to fund) and managing risk and incentives (e.g., a sole proprietorship has better incentives but worse risk characteristics compared to a company with many shareholders, a company issuing both stocks and bonds so investors can make their own risk/reward tradeoff, etc.).
I think maybe something like “finance is about how a group of people can cooperate to pursue EU maximization over time, given some initial endowment of assets and liabilities” would capture most of it?
Well yes, but no, the point is that these other people are merely means, but optimally distributing your assets over time is a means that screens off the other people, in a sense. In the end, assuming that people are really just optimizing for their own value, they might trade for that but in the end their goal is their own allocation.
When exploring things like this, taboo the phrase “really is”. No abstraction really is anything. You might ask “how can I use this model”, or “what predictions can I make based on this” or “what was that person trying to convey when they said that”.
Less philosophically, you’re exploring an uncommon use of the word “finance”. Much more commonly, it’s about choice of mechanism for the transfer, not about the transfer itself. What you describe is usually called “saving” as opposed to “consumption”. It’s not finance until you’re talking about the specific characteristics of the medium of transfer. Optimal savings means good choices of when to consume, regardless of when you earn. Optimal finance is good placement of that savings (or borrowing, in the case of reverse-transfer) in order to maximize the future consumption.
I’ve been trying to figure out what finance really is.
It’s not resource allocation between different people, because the intention is that these resources are paid back at some point.
It’s rather resource re-allocation between different moments in one person’s life.
Finance takes money from a time-slice of you that has it, and gives it to a time-slice of you that can best spend it.
Optimal finance means optimal allocation of money across your life, regardless of when you earn it.
That’s part of it, but there’s also coordination between people (e.g., investors coming together to finance a capital-intensive business that no single person can afford to fund) and managing risk and incentives (e.g., a sole proprietorship has better incentives but worse risk characteristics compared to a company with many shareholders, a company issuing both stocks and bonds so investors can make their own risk/reward tradeoff, etc.).
I think maybe something like “finance is about how a group of people can cooperate to pursue EU maximization over time, given some initial endowment of assets and liabilities” would capture most of it?
Well yes, but no, the point is that these other people are merely means, but optimally distributing your assets over time is a means that screens off the other people, in a sense. In the end, assuming that people are really just optimizing for their own value, they might trade for that but in the end their goal is their own allocation.
Ok, I think that makes sense.
When exploring things like this, taboo the phrase “really is”. No abstraction really is anything. You might ask “how can I use this model”, or “what predictions can I make based on this” or “what was that person trying to convey when they said that”.
Less philosophically, you’re exploring an uncommon use of the word “finance”. Much more commonly, it’s about choice of mechanism for the transfer, not about the transfer itself. What you describe is usually called “saving” as opposed to “consumption”. It’s not finance until you’re talking about the specific characteristics of the medium of transfer. Optimal savings means good choices of when to consume, regardless of when you earn. Optimal finance is good placement of that savings (or borrowing, in the case of reverse-transfer) in order to maximize the future consumption.
Sure. In this case “what it really is” means “what does it optimize for, why did people invent it”
I think putanumonit wrote a post that made a similar point. Might be useful in this investigation.