October 2026                                                          

                                             PART A : ARTICLE                          

              IMPROVING FINANCE EDUCATION

Many ideas traditionally taught in finance and economics classrooms are either incomplete, misleading, or too detached from real-world market behaviour. This is because academic models in finance have often prioritised mathematical elegance over practical accuracy.

Major "Mistakes" We Teach

1. Markets Are Fully Efficient

Finance theory tells us that prices instantly reflect all available information and that it is impossible to beat the market consistently.

According to Jay Ritter:

• (a) Markets are often directionally efficient, but not perfectly efficient.
• (b) Momentum, bubbles, crashes, and mispricing occur repeatedly.
• (c) Investor sentiment, narratives, liquidity, and institutional flows matter.

Examples of market inefficiency include:

• Dot-com bubbles
• Housing bubbles
• IPO mispricing
• Meme stocks

While the Efficient Markets Hypothesis (EMH) is a useful benchmark, it is not a literal description of reality.

2. Risk Equals Volatility

Finance theory teaches us that risk is measured by standard deviation and beta.

Ritter's critique is that volatility is often a poor proxy for risk.

 Permanent capital loss matters more than price fluctuations. A stock's temporary price decline becomes risky only if there is a structural disruption.

In other words, real risks include:

• Technological disruption
• Regulatory change
• Illiquidity
• Fraud
• And other business-specific risks

Investment risk is multidimensional and therefore cannot be equated with volatility alone.

3. Higher Risk Always Produces Higher Return

The standard axiom of finance is that investors are compensated for bearing more risk.

Ritter argues that, empirically, many "risky" assets actually underperform. For example:

• IPOs
• Distressed stocks
• Glamour stocks

These investments often disappoint investors.

The behavioural explanation is that investors tend to overpay for exciting stories and skewed upside potential. Investors are often overconfident, and there are limits to rationality.

4. Investors Are Rational

Classical economics assumes that investors are rational economic agents who optimize logically.

In reality, investors rely on heuristics and are subject to biases and emotions that influence their decisions.

What Finance Education Should Teach

Ritter advocates a broader approach to finance education. Financial education should embrace a comprehensive framework that combines the following:

1. Theory

Theory provides useful abstractions and conceptual frameworks, but it should not be mistaken for reality.

2. Behaviour

An understanding of human behaviour is essential for students of finance. Psychology and behavioural biases play a major role in financial decision-making.

3. Historical Perspective

A study of financial history provides valuable perspective. Past bubbles, crashes, and market cycles offer important lessons for investors and managers.

4. Institutional Knowledge

Knowledge of the institutional framework and the regulatory apparatus governing financial markets is indispensable for understanding how markets actually function.

5. Probabilistic Thinking

Given the uncertainty characterising the real world, students of finance must develop probabilistic thinking. Financial decisions should be based on probabilities rather than certainty.

Conclusion

To sum up, finance should be taught as a probabilistic social science, not as physics. Theory remains important, but it must be complemented by behavioural insights, historical experience, institutional understanding, and probabilistic reasoning to prepare students for real-world financial decision-making.

                                                            PART B : SNIPPETS

 Impact of the Announcement of SEO on Stock Price

 The stock price of a firm tends to decline when the firm announces a new issue of equity. Why? There are three plausible reasons for this strange result.

1. Informational asymmetry Managers of the firm have superior information about its intrinsic value. Hence, they try to issue new shares when the market price exceeds intrinsic value. So, when a firm announces a new issue of equity, the market infers that the stock is overvalued and bids down its stock price.
2. Debt Capacity A firm is more likely to raise capital by way of equity rather than debt when managers of the firm believe that the probability of financial distress has risen. Recognising this the market is likely to bid down its price when an equity issue is announced.
3. Issue costs Substantial costs are associated with an issue of equity is made.

The drop in stock price following the announcement of a new equity issue is about 3 percent for an industrial corporation and it is somewhat smaller for a public utility. This drop is called abnormal return in the context of the costs of new issues.

Dilution

When a company issues new equity, the subject of dilution generally comes up. There are several kinds of dilution:

1. Percentage ownership dilution
2. Stock price dilution
3. Earnings per share dilution
4. Book value per share dilution

    Though the word “dilution” has a negative connotation, only dilution of stock price is really bad.

Swap Pricing

How does the market set prices for swaps (interest rate swaps, currency swaps, or credit default swaps)? Without getting into details, let us emphasise the basic point: Swaps, like forwards and futures, are zero – sum transactions. This means that the market sets prices in such a manner that when the deal is struck it is a fair deal, with neither party having an advantage. For example the rates in an interest rate swap are set as the fair fixed and floating rates, considering the credit worthiness of the counterparties. Likewise, the currency swap may be viewed as a series of forward contracts. In a credit default swap, the rate is based on the default rate for a particular bond over a particular time.

                                 PART C : WIT AND WISDOM

Humour

Superior- Subordinate Relationship

Superior, “You must work hard.”

Subordinate, “Sir, I will hardly work.”

Superior, “Look over the details.”

Subordinate, “Sir, I will overlook the details.”

Superior, “You stand out.”

Subordinate, “Sir, I’m outstanding.”

Lottery-  Refund

Anthony bought a lottery ticket and luckily was selected for the prize that was a whopping Rs. 20 lakhs. When  he  presented the ticket he was told that he will be paid Rs. 1 lakh per week for 20 weeks. Exasperated, he  said “Give me Rs. 20 lakhs immediately or else refund Rs. 5 the cost of the lottery ticket.”

Wise Saws

1. Resolve to be tender with the young, compassionate with the aged, sympathetic with the striving, and tolerant with the weak and the wrong. Sometimes in life you will have been all of these.
2. Better to trust the man who is frequently in error than one who is never in doubt.