Innovation

Question 1

What is limited liability?

Answer 1

Concept that investors are only liable for the amount he or she put in

Question 2

How is limited liability significant in terms of behavioral finance?

Answer 2

Investors were discouraged from investing because of the risk they might be sued in the event of company failure— limited liability made it fun!

Question 3

What is the lottery effect?

Answer 3

With limited liability, investments became a throwaway item, like a lottery ticket upon losing.

Question 4

What is David Moss’s 3-pronged theory of why limited liability corporations were successful?

Answer 4

• removed debtor prison from the picture
• lottery effect— stock loss became a throwaway like a lotto ticket
• allowed for portfolios and moreover, for diversification in portfolios

Question 5

What is inflation indexed debt?

Answer 5

Tying debt, such as the government’s debt to soldiers in wartime, to inflation to offset risk that soldier pay, for example, would be worthless on payout

Question 6

What is Unidad de Fomento?

Answer 6

UF is a Method of determining Chilean currency value corrected by inflation.

Question 7

What are some real estate risk management innovations?

Answer 7

Casualty insurance, securitized mortgages, home price futures & options, equity-protected mortgages