Lecture 3 - Technology and Invention in Finance
In the beginning of the lecture, Professor Shiller reviews the probability theory concepts from the last class and extends these concepts by the central limit theorem. Afterwards, he turns his attention toward the role of financial technology and financial invention within society, in particular with regard to the management of big and important risks. He proceeds along the lines of a “framing” theme, referring to the context and the associations of inventions, and along the lines of a “device” theme, emphasizing the creation of complicated structures set up for a certain purpose, which require learning over time to be improved. His coverage of financial inventions spans limited liability for corporations and the framework of Township and Village Enterprises in China, as well as inflation indexation from its inception around the turn of the 19th century to its applications in Chile and Mexico in the 20th century. Professor Shiller concludes the lecture elaborating on swap contracts as financial inventions, and on the subsequent development of credit default swaps.