Finance as 'mathematics plus money' and the three exemplars: James Simons, Warren Buffett, Jack Welch

Professor opens 13-week MIT course for first-year MBAs by defining finance as "mathematics plus money" and motivating the subject with three profiles: James Simons (differential geometer turned founder of Renaissance Technologies; reported $1.7 billion compensation in 2006), Warren Buffett (worth $62 billion in Feb 2008, value investor using accounting), and Jack Welch (GE CEO 1981–2001 who grew revenues from $26 billion to $130 billion). He frames finance as the lingua franca of business and promises practical, rigorous tools. Two fundamental, repeated challenges drive the course: valuation of assets and management of assets. A simple in-class auction (an 'iPod Nano 4 gig version' with retail value '149' sold for '$45') illustrates market price discovery and limited information. The lecturer presents a unifying flow framework with four components of the financial system: Households, financial intermediaries, financial corporations, and capital markets. Core analytical building blocks: accounting (stock = balance sheet; flow = income statement), five corporate decision points (1) cash raised from investors, (2) cash invested in real assets, (3) cash generated by operations, (4) how much cash to reinvest, (5) cash returned to investors), and the central roles of time and risk (introduce time early; add risk after building tools). Six basic finance principles are announced: (1) 'no free lunch', (2) 'other things equal' with subrules—prefer more money to less; prefer money now to later; prefer less risk to more risk—and (3) agents act in self-interest; three further principles are deferred to the final lecture. Course mechanics: readings from Myers & Allen (chapters 1–2 due next class), problem bank (majority of exam points drawn from it), no weekly homework, recitations, one written case (10%), participation (10%), midterm (25%), final (55%). Study advice: skim lecture notes beforehand, take notes in class, do problems both alone and in groups, and attend the Practice of Finance pro-seminar (starts Sept 17).