1. Why Finance

This lecture provides a brief history of the nascent field of financial theory, beginning in business schools that were completely separate from economics, as well as my growing interest in the field and Wall Street. The foundation of standard financial theory is the efficient market hypothesis, but this hypothesis was discredited by the financial crisis of 2007-09. This lecture describes the types of questions that standard financial theory still answers well. It also introduces the leverage cycle as a critique of standard financial theory and as an explanation for the crisis. The lecture concludes with a classroom experiment that illustrates a situation in which the efficient market hypothesis worked surprisingly well.
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