Hi, welcome back. Today's the first day of the class, and I talked about the various aspects of the class at the previous session. But just to give you a sense of my style, I'm hyper. I'm nuts. I love this stuff, so I will tend to be myself with you as if you're in the room with me and I hope that's actually good for your learning rather than interfering and I talk about life and so on as we go along. The good news is you can always skip parts you don't enjoy, whereas if you will in the class, you have to suffer me throughout the class. What I'm going to do today is I'm going to start off with the content and this is what I do in class too. The first week, if it's just introductory, I don't think it's right. We have time, we have a lot to cover and I will start with the topic. One important aspect I want you to recognize is that typically in real time when you're teaching classes like this, the amount of exposure the students have to a teacher or the classroom time, if you may, is a lot more than on video and video is very intense, There are very few interruptions. Those are the downsides I think but on the other hand, as I said, you can keep learning from others and you can keep going back to the video. I want to emphasize this every time is that the good news is you have the video and I want the video to be self-contained. I will not give you too many notes. In fact, I'll encourage you if you really want to learn, and I've thought about this a lot, encourage you just to make your own notes as we are talking, I think note-taking, thinking through however you want to do, scribble on a tablet, use a pen or a paper. I'll encourage you to do that because then you've created your own set of notes. I was inclined to give you a lot of material, but there are a lot of textbooks available and they are in the syllabus. I've mentioned a few, there are others. I want you to choose your resource and me to provide you enough to be able to be successful in learning this class. We'll start talking about the time value of money today and we're going to continue this in the next week. The reason is time value of money is central to understanding finance. Let's get started. I want to pitch the beauty of finance. If you remember as its ability, the structure and the details, and the tools, the ability of finance to understand decision-making and make good decisions. We're never sure whether our decision is going to be right or wrong, but that's life, but we want to develop a framework where the chances of you making good decisions given the information you have goes up. I hope you recognize that. What is really critical to decision-making? Every decision involves time and uncertainty. I have emphasized this in the introduction of the class and I will keep emphasizing it. If you understand time and you understand uncertainty at a gut level, in a flavor context, in a daily life context, I think you would have arrived and life will be so cool, you'll be able to make decisions not using Excel, but based on your gut as if you've also used Excel because you're framework is strong, so time and uncertainty. These are common to every decision. Please recognize that, common to every decision, whether you want to cross the street or whether you want to create a new technology to solve poverty, which I hope you do. Okay, very important to understand just the impact of time on a decision and that's what we call time value of money. Typically, we ignore uncertainty for some time and I'm going to do that in a very deliberate way. I will talk about it because life is full of uncertainty but I'm going to try to ignore bringing in uncertainty simply because if we learn in a linear way, building blocks will help us get there rather than throw everything at you and it's going to be difficult. Remember, we are going to spend a lot of time understanding the impact of time with uncertainty somewhere at the back of our minds, but not explicitly accounted for. Just to really emphasize this issue, I'm putting it up as a bullet point and so that you can make notes on this. We've got to internalize the time value of money. What I'm going to do now is give you a sense of what some terminology is available to us, which actually turns out to be, except for the fact that it's an English that I'm talking makes a lot of sense and I'm going to spend a lot of time on each one of them before jumping in to actually talking about finance. You can think of it as the language of finance that we need and I'm not going to throw too much language at you. I'll throw enough so that you understand what's going on at that point in time. The first thing that we will try to talk a lot about is present value and something that's closely related to it, future value. I'll soon start drawing timelines which are very important. Basically one of the things that you need to know is how to draw a timeline and if you know how to draw a timeline half of the problem is solved because the world's problems are awesome because nobody knows how to approach them. The life in general is quite complicated, what finance does is makes it simple. That's what you want from a framework, not to make life more complicated. It's complicated enough. Look at what present value means. It means the value of anything today present as in now. What does future value mean? The value in the future and what time in the future? We'll start off with very simple examples and make it infinite future. You don't need to worry about the present versus the future, we'll structure it within a problem that you have. But the most important aspect of this is look at the units in which both are measured. The units in which both are measured are dollars or yen or rupee as I said, wherever you are, the currency of your country. You are from all over the world taking this class which that alone excites me and so hopefully I can reach you and help you learn this stuff. Whether it's a dollar or a yen or whatever, both are in dollars. Again, dollar is not the important thing, but the thing is that it's a measurement of value. A lot of things in life actually can't be measured, love for example is something that you can't put a dollar sign. That's why it's so awesome. But for matters in this class, the dollar sign is just a language of reflecting value. The unit is very important because I'm going to now go to the next thing which is n and many times it could be called t, t as in Tom, symbol. It's for the number of periods that you're thinking about. For example if you're thinking only about today versus next year, then the n is one. But notice again, why is this important? Because you recognize in a second that the passage of time alone makes decision-making both interesting and challenging. That's why I love finance is that think about it. It's just because of the passage of time. You need to worry about so many things but isn't it cool that time alone can make such a huge difference. The number of periods, now it's critical for you to understand something which I'll repeat. The problem will lend itself to the definition of the period. We'll just remember that the period doesn't have to be a year. It can be one day depending on the nature of the problem. Finally, the most critical aspects of finance is if I were to capture one element of finance that distinguishes itself from everything else, it is the next symbol, r. I'm using a lowercase r here, sometimes textbooks use caps and so on for n and so on. Don't worry about that. The critical element here is this. The first aspect of an interest rate is it's not in dollars. It is in percentage terms. It's like a change over time. This is very, very important to understand. I think intuitively you do, but practically we'll also try to see what's going on with it. The other element which is very, very important for this class and in a way, this is the one aspect of the class that I wish I could spend weeks on but we don't have the time is we'll assume the interest rate is positive. I'll say this is an assumption. Let me throw out an idea to you. Where do interest rates come from? Why are they typically positive? Can they be negative? It's a fascinating topic. I would recommend a book called Theory of Interest written in 1930 by Irving Fisher who if you read the book, it pretty much blows your mind. This guy almost a century ago has predicted all modern finance. He writes in such an awesome way, no technical staff, just some graphs. It's just awesome stuff to read but the critical aspect of that book is that it will take you off on a journey that won't be the journey we'll take, at least aspects of it. That is we will assume that the interest rate is positive because that's what we usually see but I want you to recognize that assumption right up front. Again, repeat again. I know you're clamoring for uncertainty, I'll have uncertainty, I think that's what makes life interesting. But for the time being, we are going to stick with no uncertainty. Of course that's completely unrealistic but it's simply so that our building blocks of learning and time that it takes to learn happens the natural way. I've introduced the terminology. I want you to stare at these things for a little while. Please remember I'll introduce more and I want you to get comfortable with this. For example, if you want to take a break now and you want to go to Google, that's the beauty of Google. In fact, when my son was little, even now he asks me questions and I usually don't have a clue of the answers. For example, why is the sky blue? I would say to Gabriel, Gabriel, why don't you Google? I think by about five he thought Google was this really cool person who knew everything and my dad is a loser. I just wanted to talk about this because this is cool stuff. Just go Google, try to read your book. You get familiar with these concepts a little bit if you want to take a break.
