Finance As a Human Science
Finance is a very broad term encompassing various issues regarding the study, creation, allocation, and management of funds and investments. All financial activity is effected by finance including banking, investing, and lending. The word “financial” comes from the Latin word “fiscus,” which means money. The study of finance also includes aspects such as taxation, which is concerned with the use or value of money.
One branch of finance that has developed out of and around the study of these various activities is behavioral finance. Behavior is the result of experience rather than past outcomes, so it is considered to be an empirical study rather than a theoretical one. It is used in many fields of study, but the most famous is behavioral economics. In behavioral economics, the study of behavior is studied through the study of investment choices.
Another branch of finance that is concerned with the financial systems of the individual are credit and debt psychology. Credit or debt is the repayment of a financial obligation using a credit card, loan, or other credit instrument. A credit score is derived from the amount of credit available to a person based on the repayment history of that particular credit instrument. Thus, interest and other costs are included in determining a credit score. The credit score is then used to make economic decisions such as whether or not to make an investment, to purchase real estate, or to obtain credit for larger purchases such as cars and homes.
Behavioral finance is closely related to economics and the analysis of financial systems, but there are distinct differences. The main emphasis of behavioral finance is on analyzing the behavior of individuals rather than the effects of their individual decisions on the wider economic structure. Behavioral economists focus on why people make certain decisions rather than others. They look for explanations not only for why people make the choices they do, but why other people choose different actions as well. This research is important in understanding complex social systems such as the financial markets, the government, and health care.
Public finance is the study of how the public uses capital assets and liquid capital assets such as bank loans and bonds. Public finance scholars also look at the effect of policies created by public authorities on the growth of the economy. Examples of public policies that could affect the development of the economy include taxes, social programs, trade barriers, and rules regarding financial instruments like derivatives.