Intro to Finance

Finance can seem overcomplicated due to jargon, complex calculations, or diagrams. But at its core it can be explained through two simple actions, valuation and management.

Valuing assets and managing assets.

No matter what you are doing you’re constantly engaging in these two actions: first understanding the value of something, and then deciding what to do with it.

The  Challenge of Valuation

While managing assets is often simple (you choose between clear options (buy, sell, hold)) valuation is where the real intellectual heavy lifting happens.

A classroom experiment that happened in MIT (Massachusetts Institute of Technology) makes this clear. A professor places two boxes in front of students, each randomly labeled “heads” or “tails.” No one knows what’s inside. One box is auctioned and valued by the class at $45 a seemingly fair guess, right?

But when the box is opened, it contains an iPod worth $149.

So, what actually happened?

Even though the students didn’t have full transparency, there was some amount of information: the fact that the professor can’t scam students as he would get in trouble, the size of the box, the setting. But uncertainty and lack of trust diminished the perceived value. That’s valuation—navigating incomplete information to reach a rational estimate. It’s a reminder that in finance, value is never just about what’s inside, it’s about perception.

The Financial Cycle: A Flow of Value

In the corporate world, understanding how money moves helps undeerstand why valuation is crucial. A typical financial cycle goes like this:

1. Raise capital from investors

2. Invest in assets

3. Generate cash from operations

4. Reinvest for growth or

5. Return capital to investors

Each step depends on understanding value. And at every step, the question remains: What is this truly worth?

What Actually Makes Finance Interesting yet Difficult: Time and Risk

If we lived in a world without uncertainty, finance would be a science. But two forces complicate everything:

• Time – Money today is more valuable than money tomorrow. Delays reduce value.

• Risk – The future is unknowable. Even strong data and math can’t eliminate uncertainty. Regardless of time, money in less risk is more valuable than money inside more risk.

To manage these forces, finance relies on probability, statistics, experience and historical trends, but even those have limits. This is why good financial thinking always require a balance between opportunity and caution.

Six Fundamental Principles of Finance

To help navigate this complex landscape, finance is grounded in six key principles. Assumptions that apply to the general public

1. There Is No Such Thing as a Free Lunch

If something seems too good to be true, it probably is. Free cheese is only present in a mousetrap. Every opportunity has a cost, whether it’s obvious or hidden. Finance teaches us to look deeper and go beyond.

2. People Prefer More, Sooner, and Safer

All things equal, individuals:

• Prefer more money to less

• Prefer money now over money later

• Prefer to avoid risk when possible

3. Everyone Acts in Their Own Self-Interest

This principle isn’t cynical—it’s realistic. People, investors, and companies make choices based on what benefits them most, given the information they have. This helps predict behavior in markets and explains everything from stock trading to consumer credit. Of course there are people like Mother Teresa, people who care more about the general welfare of the public. But economists have been able to redefine self-interest to suggest that Mother Teresa is also selfish. This is because the utility (satisfaction gained) she gains comes from the utility function of others. She gets happy from making other people happy. Therefore it is fair enough to say that everyone acts in their own self interest.

4. Markets Adjust to Equalize Supply and Demand

Prices aren’t static they move in response to changing conditions. If demand rises or supply shrinks, prices rise, and vice versa. Markets always clear. Supply always equals demand in the long run. Although Sir John Maynard Keynes would have probably responded by saying “in the long run we are all dead!” and a big portion of economists would disagree, this principle is accurate.

5. Financial Markets Are Adaptive and Competitive

Markets evolve rapidly. New technologies, strategies, and regulations constantly reshape how value is created and measured.

6. Risk-Sharing and Frictions Drive Innovation

From insurance to derivatives, most financial tools are about spreading risk more efficiently. But frictions—like taxes, transaction costs, or regulations—create challenges that give birth to creativity. Many financial innovations are born from the need to overcome these obstacles.

Finance: A Lens for Life

So why does this matter?

Because finance isn’t just about Wall Street. It’s about how we think, how we choose, and how we value. Whether you’re investing in yourself, a project, or a company, these principles help you cut through uncertainty and act with clarity.

Start with value. Understand risk and time. Trust human behavior over perfect models.

That’s the essence of finance.

This blog entry was inspired by the MIT OpenCourseWare content on Finance