Hi, welcome back. Today's the first day, or first week actually, of the class, and I talked about the various aspects of the class 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 know, 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. And the good news is you can always skip parts you don't enjoy. Whereas if you were in the class you would have to suffer me throughout the class. So what I'm going to do today is I'm going to start off with the content. And this is what I'll do in class too. The first week if it's left just introductory I don't think it's right. We have time, we have a lot to cover, and I will stop at 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 the a teacher or the classroom time if you may Is a lot more than on video. And video is very intense. There is 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 will encourage you if you really want to learn, and I've thought about this a lot, encourage you to make your own notes as we are talking. I think note taking, thinking through however you want to do, scribble on a table, use a pen or a paper. I'd 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're 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 and learn in this class. So, we'll start talking about the time value of money today. And we will continue this in the next week. And the reason is time value of money is central to understanding finance. So 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 solve. Or I shouldn't say solve, but to understand decision-making and make good decisions. So we're never sure whether our decision is going to be right or wrong, 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. So I hope you recognize that. So 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 framework context, in a daily life context, I think you will have arrived and life will be so cool. You will be able to make decisions not using Excel, but based on your gut, as if you've also used Excel, because your framework is strong. So time and uncertainty. These are common to every decision. Please recognize that. They're 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. Uncertainties simply because if you learn the linear way building blocks will help us get there. Rather than throw everything at you and it's going to be difficult. So remember, if we are going to spend a lot of time understanding the impact of time with uncertainty some buried at the back of our mind but not explicitly accounted for. And just to re-emphasize this issue, I'm putting it up as a bullet point and so that you can make notes on this. We got to internalize the time value of money. And so 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 in 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 into actually talking about finance. So 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. Through it clear enough so that you understand what's going on at that point in time. So the first thing that we will try to talk a lot about is present value. And something that's closely related to it, the future value. I would like you to, I'll soon start drawing timelines which are very important. So 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 it's problems are awesome because nobody knows how to approach them. World, life in general is quite complicated. What finance does is makes it simple. And that's what we want from a framework not to make life more complicated, it's complicated enough. So to 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, right? So you don't need to worry about present versus 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, whenever you are. The currency of your country. And you're 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. So, whether it's a dollar, a yen, or whatever both are in dollars and again dollar is not the important thing. But the thing is that it's a measurement of value. And a lot of things in life actually she 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. So 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. So for example, if you're thinking only about today versus next day, then the n is one. But notice again, why is this important? Because you'll recognize in a second that the passage of time alone makes decision making both interesting and challenging. And that's why I love finance. 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. So 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. So, 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, if I were to capture one element of finance that distinguishes it's self from everything else, it is the next symbol r. And I'm using a lower case r here, sometimes textbooks use caps and so one for it and so one, 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, so it's like a change over time. This is very, very important to understand and I think intuitively you do but practically we also try to see what's going on. 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. [LAUGH] But I don't have the time is we'll assume the interest rate is positive. And I'll say this is an assumption and let me throw out an idea to you where do interest rates come from? Why are they typically positive? Can they be negative? Is a fascinating topic. And I would recommend a book 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. And he writes in such an awesome way. No technical stuff, 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. And that is we'll assume that the interest rate is positive because that's what we usually see but I'd want you to recognize that presumption right up front. And again repeat again I know you're clamoring for uncertainty. I love uncertainty. I think that's what makes life interesting. But for the time being we're 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. So 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 these. So for example, if you want to take a break now and you want to go 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 what the answer is. For example, why is the sky blue? So I would say to Gabriel, Gabriel why don't you Google? So I think by about five he thought Google was this really cool person who knew everything, and my dad is a loser. So I just wanted to talk about this because this is cool stuff, right? So just go Google, try to read your book, get familiar with these concepts a little bit if you want to take a break.
