The episode begins with a metaphor: "Finance is a grocery store." The financial system brings things together for convenience, but just like a grocery store, there are good and rotten deals. UO professor of finance Al Sheen also brings his "modern Socrates teaching method" to the podcast and throws host Troy Campbell off by asking a few Socratic questions. Sheen also shares how his time on Wall Street eventually led him to the classroom. Editor Alec Cowan dips in with some practical advice about "building a financial trampoline versus financial net."
Assistant Professor Al Sheen defines finance as simply “making smart decisions with limited resources.”
“Finance is what we use to figure out if those things are ideas are good ideas to do,” he said.
What We Learned
Financial Institutions as Grocery Store Metaphor
The episode begins with a metaphor relating finance to a grocery store. This shows how the financial system brings money and goods together for convenience. But just like in a grocery store, there are good deals and rotten deals.
People need food, but supermarkets don’t produce food. They sell it. In a world without super markets, you would either need to grow your own food or live near a farm. Grocery stores are essentially the “middle men” between farmers (suppliers) and you (the consumer). Like grocery stores, financial institutions are often the middle men, and like many middle men, they have overpriced items and products that are bad for you—as well as some amazing products and services.
Similar to how grocery stores don’t grow their own food, banks don’t have any of their own money. Extending the metaphor just a bit: we provide the banks with money, they loan our money out, and we both collect interest when it is paid back. The person with their disposable income (supplier) goes to the bank and deposits their money. The bank, or middle man, takes the money and gives it to a consumer (someone who needs money). The bank profits from the consumer paying back the loan with interest.
101 Everywhere: Making Smart Decisions with Limited Resources
In Your Career… Build yourself a safety trampoline, so if the economy or a job lay off knocks you down, you can bounce back up into something better.
At School … Follow the principle of diversification in your education, and learn about a variety of different topics.
With Friends … Be careful about habitual spending habits, like coffees or take out. Those little things can add up fast.
In Romance … Remember you can’t spend everything on your love life, so have the (potentially) uncomfortable talk with your partner about what really matters.
In Politics … Remember we can’t afford everything, so get real with what you are willing to sacrifice to have the things that are essential.
The Misconceptions
As always, our guest demystified the topic and corrected a lot of misconceptions. Here are four:
- We think that finance is only for those with mathematical abilities, but often it requires little math, or at least requires a person to know very little math.
- We think we build wealth by investing, when often we should build wealth by spending less and paying off debt, especially high-interest credit card debt.
- We think we need to reduce our big purchases, but we may also need to reduce our small, habitual purchases, like coffee.
- We think we should look for great deals, when actually we also should be skeptical of the person who gives us a really good deal.
Financial Trampoline
Editor Alec helps us understand that what we call “financial safety” is actually better described as a “financial trampoline.” What we are doing is giving ourselves the ability to bounce back higher, farther, and to even greener pastures after a failure, needed break, or career change.
Alec explains further that the image of a net means that when you fall, you are sinking to the bottom. This creates a negative perspective of an already disheartening situation, making it easier to ignore the idea. If one creates the financial safety trampoline; instead, there will be resources available to make it possible to bounce back when you fall or fail.
Quotes from the Episode
As always, the episode left us with some good quotes.
“Finance is what we use to figure out if those things are good ideas to do.”
“If I decided I wanted to come up with a new brand of ketchup and sell it, I’d use tools and finance to determine whether or not it makes sense to spend our limited amount of money to go and do a project like that.”
“A person can easily spend 2 percent of their pre-tax annual income on coffees . . . It’s not death by sports car, its death by 1,000 lattes.”
in this education? It applies to governments: We have limited government budgets. And, so, if everyone was really good at finance, if this world could do this very well, we would be efficient spending machines.”
Private Equity Firm Takeover
In the episode, assistant professor Al Sheen relates the idea of a private equity firm to house flippers, or people who take run down houses and renovate them to sell.
Like a house flipper, private equity firms take over an existing business and try to make it better. It is in the best interest of the firm to improve the company by making the business the best that they can, so they can maximize profits. Although this may seem greedy at times, it does not make sense for them to buy a company and then destroy it.
Sheen’s research shows that when private equity firms take over restaurants, the health codes go up.
Sheen said, “Private equity comes in and restaurants get cleaner. They have fewer violations and rats in the kitchen—fewer health code mistakes. People are putting their hair in hairnets.”
While Sheen’s work doesn’t say private equity take over is good everywhere, all the time, in every way, his work challenges the often-cited notion that private equity simply makes all things worse.
Al Sheen’s Finance Basics
Professor: Al Sheen
Location: Lundquist College of Business, Department of Finance
Class Size: Approximately 60 students
Teaching Style: Variation on the Socratic method
Class Goal: Learning how to think critically about how to use limited resources