Why is finance important?

finance photo

Finance is important because it can contribute to the success of individuals, businesses and economies.

Individuals: Finance can help people make smart decisions about saving and investing. The decision can range from retirement planning to aggressive investing. Although much more risk might be present in the latter case, it also gives the possibility to obtain higher rewards. Examples of successful individuals who benefitted from their financial decisions include Warren Buffet (who is perhaps the most famous investor worldwide), George Soros (successful for making large bets in the currency and commodity markets), John Paulson (who shorted CDOs and mortgage backed securities during the housing bubble) and James Simons (successful for his quantitative approach).

Businesses: Many of the greatest businesses would not exist nowadays without the development of financial markets and institutions. Take Hollywood as an example. The blockbusters we watch in the cinemas would not have been able to come to life without the existence of Wall Street. Imagine the cost of a film such as Avatar, estimated to be around 300 million dollars. A single individual might not be able to cover such a huge cost and even if he/she were, he/she might be unwilling to take the risk. However, thanks to Wall Street, the required capital could be raised and the risk could be diversified, so that many individuals shared the potential loss or benefits. Risk diversification and fund raising are some of the functions of the financial system that allowed many of the greatest business ideas to come to life.

Economies: The financial system brings efficiency to the economy by allocating resources to their highest use, both across space and time. Research has shown that the financial system can cause economic development. King & Levine (1993)[1]have found using data from 80 countries over the period 1960 – 1989, that the financial system can promote economic growth. In another study, Calderon & Liu (2003)[2]confirmed the existence of a causal relationship and argued that the financial system can drive economic growth through both a more rapid capital accumulation and productivity growth.

The significant influence of finance on individuals, businesses and economies is one of the reasons why I am deeply interested in finance. I want to become an explorer of the financial world and with this post I am starting a journey in which I hope to use this website as a platform to learn from experts in the field and see my continuous progress.

[1]King, R. & Levine, R. (1993), “Finance and Growth: Schumpeter might be right”, Quarterly Journal of Economics 108(3): 717 – 37.
[2]Calderon, C. & Liu L. (2003), “Direction of Causality between Financial Development and Economic Growth,” Journal of Development Economics 72: 321–334.