Test 1

heuristic

any approach to problem solving or self discovery that employs a practical method that is not guaranteed to be optimal, perfect or rational-- but is self sufficient for an immediate or short term goal

heuristics influence?

how we process information, how we view events, how we view our actions/ actions of others

confirmation bias

the tendency to process information by looking for or interpreting information that is consistent with one's existing beliefs

hindsight bias

we tend to see events as more predictable than they are and become convinced that we accurately predicted an event before it occured

actor observer bias

we attribute our actions to external forces beyond our control but that of others to their own internal causes

self serving bias

we tend to give ourselves credit for sucesses but blame failures on outside causes

human decision-making is based on three characteristics:

incentives, imperfect maximization, resourcefulness

economic activity

the production of goods and services we need to live

economic activity defining characteristics

resources are scarce, demand is inifinite

How to organize economic activity?

Organized by property rights

property rights

the right to control an asset, how it is used, how the benefits from this use are distributed, etc.

three facets of economic activity

government, experts, and markets (buyers/sellers)

government debt

Social Security will run out of money in 2035, Government has over 1.8 trillion dollars in debt, and the interest payments are racking up

capitalism

An economic system based on private ownership of capital (efficiency)

socialism

A system in which society, usually in the form of the government, owns and controls the means of production (fairness)

Positive incentives encourage efficient use of scarce resource to produce what people actually want leads to higher standards of living

True

morals

describe one's subjective values concerning what is right or wrong

ethics

moral principles applied to questions of correct behavior within a relatively narrow area of activity; universal fairness and the question of whether or not the action is responsible

a business

an organization that produces goods or services for sale to customers at a profit

nonprofit organization

created and operated by charitable or socially beneficial purposes rather than to make a profit

opportunism (Adam Smith)

when market participants seek to benefit themselves by unethical behavior reduces both the efficiency and fariness of economic activity

creative destruction

the dismantling of long standing practices in order to make way for innovation, seen as a driving force in capitalism

what limits opportunistic behavior (markets)

choice in markets

self interest (Adam Smith)

when market participants pursue their own interests and don’t respect the rights of other market participants

economic efficiency

the quality of economic activity in which resources are used and goods are distributed in a way that generates the greatest benefits to producers and consumers

4 elements that determine a business's ability to raise capital

life, liability, transferability, value

capital structure decision

The decision on how to raise capital

capital budgeting decision

how the company should invest its money

who recieves products/payments from a corporation?

Shareholders and Stakeholders

Shareholder

forms a corporation by securing a corporate charter; they provide equity captial, residual risk bearers

stakeholders

promised specific payments, are affected by coporate actions for ex: an employee of a company

goal of a corporation

to maximize shareholder wealth

proprietorship

simple business that do not need need a lot of specialization or capital, the individiual is the business, ex: a plumber

partnerships

provide specialization, especially in professional services but do not need large investments

corporations

separate from owners; specialization allows for large, complex production of goods and services, they can issue equity ownership in the form of shares, profit is limited by regulation, competition, control of managers

external control devices

controls placed on managers from outside of the firm: government regulation, institutional investors, external audtis

internal control devices

compensation contracts, board of directors, governing documents, managers

horizon problem

managers focus more on making themselves look good that they neglect the long-term prosperity of the company

agency conflict

managers (agents) seek out their own benefit rather to work for the benefit of the shareholders (principals)

people are motivated by

incentives

example of creative destruction

AI replacing jobs

profitable companies are efficient in

Organizing productive activities, Raising investment capital, Managing day to day operations

3 roles of government

economic welfare of its citizens, limit opportunistic behavior, modify or replace markets

proprietorships/partnernships raising capital

They are limited by what the proprietor/partners can raise personally. They must borrow money as individuals and are fully liable for the business's debts.

corporations raising capital

can raise large amounts of capital by issuing stocks, can borrow for long periods of time, easy to value a corporation and if needed, easy to buy or sell stock

working capital decision

how to manage short term expenses

to earn profits, corporations should follow these rules

offer customers a good value, use only resources necessary and make the best use of investment capital

agency costs

When agency do not act in the best interests of the company-- a reduction in the corporation's cash flows created by the agency conflict

examples of agency costs

excessive executive perks like limo, planes, etc

impefect humans may be guided by their own ____ rather than the stated goals of their organizations

Incentives

example of human behavior (unethical) in organizations

political leaders who hid money, catholic church sexual abuse scandal