Clustering Illusion
What is Clustering Illusion? Clustering illusion refers to a cognitive bias in behavioral finance in which an investor observes patterns in what are actually random events. In other words, clustering illusion bias is the bias that arises from seeing a trend in random events that occur in clusters that are actually random events. The clustering…
Vickrey Auction
What is a Vickrey Auction? A Vickrey auction is a sealed-bid auction where bidders submit bids without knowing the bids of other people. However, as opposed to other sealed-bid auctions, the price paid is the second-highest bid price and not the winning bid price. The Vickrey auction was named after William Vickrey, a Canadian who…
Maslow’s Hierarchy of Needs
What is Maslow’s Hierarchy of Needs? Maslow’s hierarchy of needs is a theory of psychology explaining human motivation based on the pursuit of different levels of needs. The theory states that humans are motivated to fulfill their needs in a hierarchical order. This order begins with the most basic needs before moving on to more…
Operating Risk
What is Operating Risk? Operating risk is the risk related to a company’s cost structure. More specifically, it is the risk the company faces due to the level of fixed costs in its operations. Together with sales risk, operating risk is one of the two components of business risk. Operating Risk as a Component of Business…
Drags and Pulls on Liquidity
What are the Drags and Pulls on Liquidity? The drags and pulls on liquidity are the factors that negatively affect a company’s cash inflows and outflows by determining a deterioration in its liquidity position. A drag on liquidity exists when cash inflows lag, for example, because a company is facing trouble with the collection of…
Narrow Money
What is Narrow Money? Narrow money is a way of measuring and categorizing the money supply within an economy. It includes specific kinds of money that are highly liquid. Due to its liquidity, it is easily accessible and can be used for immediate spending. Some examples include cash or checkable deposits. It is important to…
Neutrality of Money Theory: Definition, History, and Critique
A staple in classical economics, the neutrality of money theory suggests that changes in the supply of money within an economy only affect nominal economic variables such as exchange rates, wages, and the prices of goods and services. Changes in the money supply do not affect real economic variables, such as consumption, employment, and real…
Demand for Money
What is Demand for Money? The demand for money is the total amount of money that the population of an economy wants to hold. The three main reasons to hold money, as opposed to bonds, equity, or other financial asset classes, are as follows: A transactions-related reason – People need money on a regular basis…
Sources of Liquidity
What are Sources of Liquidity? For a company, its sources of liquidity are all the resources that can be used to generate cash. There are generally two major classes of sources of liquidity for a company: The primary sources of liquidity, which are either cash or other resources that can be converted into cash very…
