Glossary

Abundance - The condition where needs are relatively satiated and demand is sufficiently satisfied, with bountiful wealth in the coffers.

Adverse Selection - The current options available suggest that, unless the premises are revisited, any solution will be less than optimal.

Agency - The relationship between agents (i.e. employees, management) who work on behalf of principals (i.e. owners). If incentives for agents are properly aligned, agents take actions that benefit the principal.

Agency Problem - There is no such thing as a perfect agent. When an agent takes actions that benefit themselves and short change the principal, there is usually a problem with incentives. Even if the agent is for the most part trustworthy and reliable to work on behalf of the principal & incentives are reasonably aligned, there is still a transaction cost evident because the principal needs to monitor the agent.

Aggregate - All component factors taken as a whole.

Alienability - The property of an asset that it can be sold to another and the gains of the sale (less taxes) accrue to the seller.

Amortization - Accounting term by which the value of an intangible asset such as a copyright, patent or trademark is reduced on the balance sheet over time.

Appropriation - The seizure or claim of ownership on an asset or natural resource.

Arbitrage - Riskless trade capitalizing on the simultaneous trade of the same good on two disparate markets. To buy oil at the lower price on the Chicago commodities exchange (CBOT) and sell oil at the higher price on the Financial Times and London Stock Exchange (FTSE) would be an arbitrage opportunity. According to the Efficient Market Hypothesis, arbitrage opportunities disappear more or less instantaneously, as if someone finds an opportunity to arbitrage, they typically execute the trades with such volume that they essentially erase the price differential for future trades.

Asset Specificity - The quality of an asset that determines the value of its highest use in relation to its next best use. In the absence of reasonable substitutes, the owner of the asset can charge monopolistic rents.

Availability Hueristic - The shortcut to decision making that favors information that is readily available without considering the specific data that would point to an 'unlikely', but better-informed, conclusion.

Behavioral Economics - The application of economic principles as a function of human behavior.

Black Box - A process that is unobservable by way of obfuscation and/or the inability to monitor.

Black Market - A marketplace for illegal goods and/or services. Because of the illicit nature of black markets, their economic impact is largely unobservable, leading to increased monitoring costs for the police powers of the state.

Breakeven Point - The point at which costs and benefits are equally offset, after which (in lieu of a change in their structural relationship) the balance shifts from one to the other.

Bundling - The practice of combining goods or services to get a higher overall price point rather than selling the different pieces individually.

Bureaucracy - The administrative function of a government organization.

Brinksmanship - A faceoff between often hostile negotiation partners that reaches a fever pitch which, barring restraint, could result in both participants being worse off.

Call Option - The right to purchase a security at a specific price at a specified future date.

Capital Investment - Investments in plant and/or equipment. Typically investment in capital is given preferential treatment in terms of corporate taxes.

Carrying Value - The ability of a product to maintain its value throughout the product's life cycle.

Cashflows - Money going both into and out of an organization.

Central Planning - The system of governance that espouses the belief that factor prices, division of labor, and the bulk of management planning is best handled by the government as opposed to the private sector.

Channel - An outlet for goods or services, whether physical or virtual.

Chinese Wall - An imaginary line between commercial banking and investment banking for a bank that handles both types of business. The line is meant to assuage conflicts of interest, and a breach would be considered trading on inside information.

Collateral - Money or property promised as a measure of good faith to incur a debt.

Collateralized Debt Obligation (CDO) - Assets built by repackaging mortgages into separate financial instruments that can be traded on an exchange.

Commodity - A good that is sufficiently uniform that it can be traded in an exchange at a common set of specifications.

Compound Interest - The principle behind the time value of money. Interest is earned on a principle, and then over time, the interest earned is added to the principle. Thus interest on interest is earned. In elementary calculations of interest, principle and interest are kept in separate buckets, leaving the notion of 'simple interest' where the principle remains constant.

Complimentary Goods / Services - A good whose usage parallels another an therefore has a price impact on the other good.

Conspicuous Consumption - The tendency for consumers to spend frivolously not necessarily beyond their means, but as a display of superfluous waste for social gain as opposed to straight-up utility.

Contrarian - The investment strategy in which an investor chooses the action in direct opposition of what the preponderance of advice in the investing literature recommends.

Cost Accounting - The practice of determining unit cost of production on a mass scale. Typically costs are either fixed or variable.

Cost Prohibitive - The assessment that the costs of undertaking or continuing an action is too costly to proceed.

Credit Market - The market for individuals and businesses to secure loans. The credit market revolves around the interest rates by which lenders can profit and borrowers must pay to retain those loans.

Credit Rating - The calculation made by credit bureaus or investment analysts intended to measure the veracity of an individual or a corporation's ability to pay back their debts without default.

Crunch - The condition in the credit market where lenders are not lending and borrowers have a difficult time securing debt financing.

Debt Ceiling - The limit by which the U.S. Treasury is allowed to borrow on behalf of the full faith and credit of the United States dollar.

Decentralized - The dissemination of decision making through several, less coordinated (than centralized) channels. Decentralized decision making is costly from the point of monitoring costs, but less costly in terms of transfer loss of specific task-oriented knowledge.

Deficit Spending - Borrowing by debt financing. Spending in excess of incoming revenue.

Demand - The desire for consumers to purchase a good or service. Demand is subject to supply, and the interaction of supply and demand set the market price.

Demand Curve - The graphical representation of the market's desire for consumption of a particular good or service at progressive price levels.

Depreciation - Accounting term by which a physical, tangible asset is reduced in balance sheet value over the asset's useful life.

Derivative Instruments - Options or futures contracts which can be traded, presumably either to hedge risk, but also for speculation.

Disincentive - The threat of punishment for taking a particular action.

Disruptive - An industry-changing product or service that upsets the status quo.

Division of Labor - Parsing down the process of production of a good or service into smaller, more repeatable processes. The ability to specialize in a particular facet of production is emphasized, while the ability for any particular laborer to gain more generalized experience and earn a broader ownership of craftsmanship is lost.

Double-Dip Recession - When an economic recovery from two successive quarters of lower GDP is stalled and abruptly returns to recessionary conditions.

Economies of Scale - Scale economies are the realization of efficiency characterized by increasing ability to lower variable costs.

Efficiency - Maximizing benefits while minimizing costs.

Efficient Market Hypothesis - The theory that if prices are allowed to flow freely, for the most part buyers and sellers will naturally gravitate toward a single price, the "market price", in the absence of market failures. All information is believed to be immediately factored into the current price, limiting opportunities for arbitrage to the barest minimum.

Equity - Ownership in a business or a particular outcome to a scenario.

Endgame - The conditions surrounding the point of time during a contest of competitors where 'winners' and 'losers' are determined.

Event Horizon - The scope of time when an endgame scenario figures into the calculation of value. At the end of an investment or schedule of payments, the terminal value of an asset is reflected in either it's resale value at close, the amount of residual value it can produce, the breakapart value of the asset, or what accounting value can be derived from keeping the asset on the books.

Exchange Rate - The ratio of one currency to another in a foreign currency.

Experiential Value - In marketing, the value derived by the consumer in terms of the surrounding environment and customer service provided.

Expiration Date - The date when the right to purchase a call option or sell a put option expires.

Exposure - The risk assumed by a lender, the risk undertaken as a borrower as it relates to collateral, or the risk of an investment based on the purchase price. Exposure can theoretically be hedged through options and futures contracts.

Externality - The condition of market failure that exists when benefits/costs of a particular action are not borne entirely by private ownership, but instead society either benefits or incurs some of the costs instead of the private entity, or vice versa. That is, society may receive benefits or incur costs that are the product of private enterprise.

Factor Multiplier - A tendency to impact an economic factor (i.e. cost, price or profit) by multiplying their impact many times over.

Federal Reserve Bank - The lender of last resort, charged with the task of monetary policy for the whole of the United States banking system. Typically they manage the money supply through the adjustment of the prime interest rate.

FDIC-insured - stands for Federal Deposit Insurance Corporation. The insurance backed by the United States that someone's bank deposits are safe in the event that a bank fails. Once capped at $100,000, the Frank-Dodd Wall Street Reform and Consumer Protection Act raised to its current level at $250,000.

Financial Engineering - The practice of creating derivatives (options) based on the underlying value of one or several assets such that they can be traded on the open market.

Fixed Costs - Costs incurred in the production of a good or service that are not affected by the quantity of goods or services produced.

Forward Contract - An agreement to buy or sell something, typically a foreign currency, at a specific date in the future at an agreed upon price at the immediate execution of the contract. Forward contracts are NOT traded on the open market, but are instead an agreement between one party and a counter party, which is typically the first party's bank.

Free Cash Flow - The amount of cash an organization has on hand for discretionary spending after their liabilities are covered.

Free Ride - The tendency for unmonitored and/or unchecked agents to rely solely on the efforts of others and still extract value from their efforts.

Futures Contract - An agreement to buy or sell something, typically a commodity, at a specific date in the future at an agreed upon price some date in the future at a price agreed as of the execution of the contract. Futures contracts are traded markets such as the Chicago Board of Trade (CBOT).

Game Theory - The study of strategic gamesmanship between self-interested parties competing or cooperating to maximize their potential rewards. As with as literal games such as chess, the colloquial nomenclature of competitive sports is often used in the context of businesses trying to outdo each other in an industry.

General Knowledge - Information characterized by the relatively small cost of transferring from one entity to another.

Gray Market - A market where the legality of the product or service in question is in conflict or not readily apparent because an existing disparity in enforcement of jurisdiction.

Great Recession - The period roughly between December 2007 & June 2009 when GDP fell in two or more successive quarters (3 month periods).

Gross - A broad description of a value before adjustments are made to arrive at a net figure.

Gross Domestic Product or GDP - The macroeconomic measure of the market value of all goods and services produced in a country in a year.

Gross Margin - Gross Revenue less cost of goods sold (COGS) as a percentage of Gross Revenue.

Hedging - A method of minimizing risk on a particular investment by purchasing/writing options that offset the original investment; or, similarly, by using forward or future contracts in a foreign currency in an effort to limit exposure. While the hedging purchase does limit the upside potential of the investment, ostensibly the more important factor is the limitation of downside risk.

Hedge Fund - A group of less than one hundred investors who can legally skirt the government regulations of larger investments open to the general public. While the name implies that the investment is one to "hedge" or minimize the risk of their investment holdings, in practice hedge funds take significant risks in attempts to outperform the more traditional, regulated investments that are subject to larger regulatory scrutiny.

Hold Up Problem - A facet of market power that allows an owner of a specific asset to deny access to that asset to potential users and command monopolistic rents. A hold up problem suggests that there are no perfect substitutes for the asset in question.

Incentive - The promise of a reward for taking a particular action.

Indifference Curves - Graphical representations of a particular consumer's preference to consume x product or service in comparison to y product/service.

Inflation - The rate by which the cost of goods and services increase over time.

Information Asymmetries - The condition that one party in a transaction has different understanding or belief about the underlying economic value of an asset than their trade counterpart. In the absence of information asymmetries, their would be no reason to trade. Both sides of a transaction, both the long and the short positions, have different expectations, or at least different financial realities (i.e. dire & immediate need for cashflow), or they wouldn't have reason engage in a transaction at all.

Integrated - The combination of marketing efforts through several different channels.

Interest - The time value of money as it is either gained through lending or lost through borrowing.

Interest Rate - The percent that a lender receives in proceeds from a borrower for the length of the lending period.

Intellectual Property - Original works of art, business processes, or unique inventions that are afforded protection under copyright, patent and trademark laws.

Internal Controls - The mechanisms by which management and majority stakeholders monitor the activities of an organization to see that assets are utilized and costs are managed effectively.

Intangible Asset - An accounting term for an item on the balance sheet that can not be touched. Intangible assets are amortized over their useful life. A copyright, patent or trademark are examples of intangible assets.

Knowledge Management - The study of the processes and systems by which knowledge is arranged and stored in the most efficient and intuitive manner so that information can be easily shared.

Leakage - The difference between value created and value captured.

Leverage - The use of debt financing to trade or operate a business. Leverage implies that the borrower believes that they can earn proceeds on the borrowed funds in excess of the interest rate on the loan.

Law of Large Numbers - In statistics, when there is a sufficient sample size, certain determinations, such as an average, are descriptive of an entire population. Probability becomes more reliable as the number of observations in an analysis increases.

Law of Unintended Consequences - The notion that while people respond to incentives, incentives are rarely perfect in design or execution, and therefore are subject to agency costs.

Margin Call - A broker's right to demand additional funds from an investor who's position in a bond or stock has sufficiently lost enough market value to exceed that investor's ability to borrow. If the investor is unable to provide the additional funds, the broker has the right to close the trader's position and claim the proceeds as payment for the funds loaned to the investor.

Market-based Solution - A free-market approach for resolving inefficiencies.

Market Capitalization or Market Cap - The number of outstanding shares of stock multiplied by the market price. Used to determine market value a public company.

Market Price - The agreed upon price that enables a market transaction between buyer and seller.

Market Power - The ability of a supplier of a good or service to earn extraordinary returns because of a lack of competition and/or switching costs.

Monopoly - A market for which there is a lone supplier of a particular good or service. Monopolies are, for the most part, considered illegal in modern capitalist states since the absence of competition allows the monopolist to command a price premium far and above "fair market value".

Monitoring Costs - The transaction costs incurred in order to ensure that the actions of an agent are for the benefit of the principal and associated stakeholders.

Net - A number that has been revised from a gross assessment through various deductions.

Nominal - A descriptive determination that is numerically symbolic and relative but distinguished from real value.

Outlay - A charge or cost borne, usually at start up, & most typically describing a capital investment.

Opportunity Cost - Costs incurred when forsaking one action in favor of another. The potential difference between the two is known as the opportunity cost.

Options - The financial instrument that gives an investor the opportunity to take a specified action (buy or sell a security) at a certain price (strike price) at a particular date in the future (expiration date).

Path Dependence - Value created that can be ascribed to the temporal evolution of an asset. When the history of a product or processes development becomes more difficult for competitors to replicate, it becomes more valuable.

Payola - The illegal quid pro quo profiteering in the commercial radio industry where disc jockeys and station programmers were paid by record companies to spin particular records.

Pecuniary Costs - Costs that can be ascribed to a specific denominational value (i.e. U.S. dollars, Euro dollars, etc.)

Perfect Substitute - A replacement good or service that provides all the same benefits as the original and potentially more. Sometimes considered a 'leapfrog' when dealing with technology.

Political Costs - The real or imagined consequences that figure into the policy positions of an elected official and accrue due to the fact that the official is not a perfect agent. Transaction costs occur when he acts in his own self interest as opposed to the best interest of his constituents. Alternately, the cost of losing his official capacity through the electoral process or revolution.

Portfolio Theory - Introduced by Harry Markowitz, the reduction of risk of a potential holding of securities by diversification. The collective risk of a portfolio of six to eight stocks is generally safer than holding any one of those securities alone. The intent of diversification is meant to reduce downside risk.

Point of Diminishing Returns - The point at which the benefits for a particular action, policy, or status are overshadowed by the costs. Nearly identical to Breakeven Point, except the impetus of the factor in question is characterized as decreasing as opposed to increasing.

Premium Price - In pricing theory, the ability for a seller to command an amount over and beyond the price of a mere commodity. This is done through some means of differentiation in product or service.

Price Elasticity - The change in the demand for a good at increasing or decreasing prices.

Price Gouging - The practice of using natural disasters or other extraordinary events to raise prices far and away higher than under ordinary conditions. Most states have laws against price gouging, though defining what percent of a price change constitutes price gouging is usually hard to define by law.

Price Taker - A consumer who is held up by market power of the supplier, lacking substitutes for a specific asset, and subject to monopolistic pricing.

Prime Interest Rate - The monthly rate set by the Federal Reserve Bank from which all other commercial, private, and international bank borrowing rates are measured.

Property Rights - Ownership of an asset, whether physical (i.e. real estate) or intellectual (i.e. copyright).

Put Option - The right to sell a security at a specific price at a specified future date.

Relative Statistics - The comparison of two or more values in relation to one another. Typically relative statistics take the form of ratios or factors of one another.

Rationality - The assumption & belief that individual agents act in according to their own best interest. This can be complicated by transaction costs such as the principle/agency dilemma, information asymmetries, and the fallibility of homo sapiens as opposed to homo economicus.

Reporting Bias - Data used in an analysis is systematically skewed toward under-reporting or over-reporting of particular results. Reporting bias suggests that the scientific method has not been followed in terms of experiment design.

Reserve Currency - The use of a foreign government with it's own money keeps a traditionally safer (typically the U.S. Dollar) on reserve in an effort to bolster the stability of their own currency.

Return & Risk - The expected return on any particular investment is proportional to the risk of that investment. The higher the risk for the investor, the higher the expected return. Profits earned with no risk, in theory, are considered arbitrage opportunities. If an arbitrage opportunity arises, players in the market will act immediately to capture profits, such that future attempts to "time the market" will disappear.

Risk Averse - The trait where risk in general is not desirable without substantial rewards to offset that risk.

Risk Lover - Some who is bound to take risks in excess of the traditionally rational benefits they might receive. They may perceive social benefits (esteem, rush of adrenaline, reputation for being unpredictable) to be greater than the lopsided probabilities of losing wealth, life or limb.

Risk Management - The practice in institutional banking and corporate finance that measures and monitors risk as a function of enterprise planning.

Risk Taker - Someone who makes a calculated and informed decision about taking an action and the potential rewards.

Risk Tolerance - An individual or entities' ability to shoulder risk, ostensibly in able to gain some reward as a result.

Scarcity - The condition of limited supply for a good or service demanded by consumers. The more difficult it is to obtain something, as a rule, the more expensive it's bound to be.

Search Costs - Transaction costs incurred while seeking competitive prices and bids.

Self Selection - An instance where the individual chooses his own level of production and associates.

Shelf Life - The length of a product to maintain its value when lying in wait in inventory.

Short Position - When an investor borrows someone else's stock, hoping that it will lose value so that they can sell that stock back at a lower price and claim the difference as profit.

Social Costs - Costs that may not be measurable in specific terms, but which nonetheless can be attributed to a particular activity. For instance, the reputation of a brand would suffer if an executive for a company was indicted.

Specific Knowledge - Information characterized by the relatively large cost of transfer from one entity to another.

Status Quo Bias - The tendency for existing parameters to remain in the state they were previously. Usually the uncertainty and difficulties of change provide impetus for the status quo.

Subprime - Mortgages to risky borrowers euphemistically named to suggest their inherent credit risk.

Strike Price - The purchase or selling price for the holder of a call or put option, respectively.

Subsidy - When the state makes a payout to a private entity in an effort to manage production or under the auspices of changing the competitive environment of an industry.

Substitute Goods - Goods that can be exchanged for others in purchase decisions and still perform the same job.

Sunk Cost - A cost incurred in the past that is not relevant to future decision making. 'Bygones are forever bygones'.

Supply - The availability of a good or service. The market price for that good or service is determined by the interaction of supply & demand.

Suppy-Side Economics - The theory that tax cuts for wealthy individuals and large corporations will lead to greater spending by wealthy individuals and corporations. Largely disproved as a myth, supply-side economics exists in right wing political circles largely because lower taxes are self serving and philosophically easy to justify for cheap political points.

Switching Costs - The transaction costs attributed to changing from a service or good to a substitute, subject to the level of competition in an industry.

Synergy - The situation where the whole of an organizations value is greater than the sum of its component parts.

Tangible Asset - The accounting term for a physical asset that can be touched. On the balance sheet, tangible assets can be depreciated over the assets useful life. Real estate holdings are considered to be an example of tangible assets.

"Too Big To Fail" - Policy of bailing out large financial institutions such as hedge funds (i.e. Long Term Capital Managment) or banks whose dissolution is believed to be so great that theoretically they could lead to the collapse of the entire commercial banking system.

Transaction Costs - All the costs associated with the procurement of a service or good that are not directly attributed to that service or good. A "service charge" for purchasing through Ticketmaster is one particularly eggregious example of a transaction cost.

"Trickle Down" Effect - The supposition that tax breaks to the wealthy and large corporations will lead those wealthy individuals and large corporations to create jobs and increase spending that produce benefits for lower income brackets and small businesses. In practice, the trickle down effect has not been observed.

United States Treasury Bond or T-Bill - Debt financing issued by the U.S. Treasury guaranteed by the United States' ability to pay back that debt.

Utility - The capability of an asset to become functionally useful or productive.

Variable Costs - Costs incurred in the production of a good or service that are driven exclusively by the quantity of goods or services produced.

Volatility - The swing in value of an investment as measured through exposure to risk.

Voodoo Economics - The term coined in a Republican Primary debate by George Bush, Sr. referring to Ronald Reagan's touting of supply side economics. Interestingly enough, after Bush, Sr. became Reagan's Vice President & went on to win the Presidency himself, Bush, Sr. became the primary ringleader and biggest cheerleader of Voodoo Economics.

Widget - The catch-all example of an imaginary good, used for purposes of illustration.

Willingness to Pay - An expression of the consumer's response to price and quality considerations and reflected in price elasticity.

Zero-Sum - The condition in a competitive struggle where an all-or-nothing situation exists with regard to potential outcomes. Without ambiguity, the winner wins and the loser loses.