- Industry: Economy; Printing & publishing
- Number of terms: 15233
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A rough guide to whether the rewards from an investment justify the risk, invented by Bill Sharpe, a winner of the Nobel prize for economics and co-creator of the capital asset pricing model. You simply divide the past return on the investment (less the risk-free rate) by its standard deviation, the simplest measure of risk. The higher the Sharpe ratio is the better, that is, the greater is the return per unit of risk. However, as it is a backward-looking measure, based on what an investment has done in the past, the Sharpe ratio does not guarantee similar performance in future.
Industry:Economy
Selling a security, such as a share, that you do not currently own, in the expectation that its price will fall by the time the security has to be delivered to its new owner. If the price does fall, you can buy the security at the lower price, deliver it to whoever you sold it to and make a profit. The risk is that the price rises, leaving you with a loss.
Industry:Economy
Doing things that make you better off in the short-run but worse off in the end. After the bursting of the stock market bubble and the failure of Enron at the start of the 2000s, much like during the 1980s, accusations of short-termism were often made against the stock market-focused capitalism of the United States and the UK. During the bubble, it was claimed, investors had become too focused on short-term profits and changes in share prices, and failed to probe deeply enough into long-term performance. As a result, managers did things that made their profits look as good as possible in the short run, often to the detriment of their company's long-term health. Indeed, many firms engaged in misleading and even fraudulent accounting practices to inflate short-term profits. In the 1980s and early 1990s, the complaint took a slightly different form, and was arguably less convincing, namely that short-termism caused lower levels of investment by businesses than in countries where the stock market was less important, such as Germany and Japan.
Industry:Economy
A solution to one of the biggest sources of market failure: asymmetric information. Often the biggest problem facing sellers is how to convince buyers that what they are selling is as good as they say it is. This problem arises in situations where the qualities of the thing being sold cannot be observed easily by buyers, who thus fear that sellers may be conning them. In such situations, an answer may be for sellers to do something that shows they mean what they say about quality. This something is what economists call signaling. Going to a leading university might be worth far more for what it signals to prospective employers about your abilities than for what you learn as a student. Likewise, the fact that a firm is willing to spend a lot of money advertising its product may say far more about what it thinks of the product than any information included in the actual ad. To be useful, signals must impose more costs on those who use them to send false messages than any gains to be had from lying.
Industry:Economy
Interest calculated only on the initial amount ¬borrowed or invested. Contrast with compound interest.
Industry:Economy
The overall impact of an economic activity on the welfare of society. Social benefits/costs are the sum of private benefits/costs arising from the activity and any externalities.
Industry:Economy
The amount of community spirit or trust that an economy has gluing it together. The more social capital there is, the more productive the economy will be. Yet, curiously, one of the best-known books to address the role of social capital, "Bowling Alone", by Robert Putnam of Harvard University, pointed out that Americans were far less likely to be members of community organizations, clubs or associations in the 1990s than they were in the 1950s. He illustrated his thesis by charting the decline of bowling leagues. Yet the American economy has gone from strength to strength. This has led some economists to question whether social capital is really as important as the theory suggests, and others to argue that membership of bowling leagues and other community organizations is simply not a good indicator of the amount of social capital in a country.
Industry:Economy
The name given to the economic arrangements devised in Germany after the second world war. This blended market capitalism, strong labor protection and union influence, and a generous welfare state. The phrase has also been used to describe attempts to make capitalism more caring, and to the use of market mechanisms to increase the efficiency of the social functions of the state, such as the education system or prisons. More broadly, it refers to the study of the different social institutions underpinning every market economy.
Industry:Economy
Creating a country that works out of one that does not - because the old order has collapsed (as in the former Soviet Union), or been destroyed by war (Iraq), or never really functioned in the first place (Afghanistan). To transform a failed country can involve establishing order through the rule of law and creating legitimate government and other effective social institutions, as well as a credible currency and a functioning market economy. Nation building is rarely easy, and often fiendishly difficult, especially where there are deep ethnic, religious or political divisions in the population or the country has no history of ever functioning effectively. Outside expertise, such as from the World Bank, and money (as in, most famously, the Marshall plan) can help, but they are no guarantee of success.
Industry:Economy
