Why Study Economics at Nottingham? Dr. Tim Lloyd Associate Professor

Why Study Economics at Nottingham? Dr. Tim Lloyd Associate Professor Mrs. Jo Morgan Admissions Officer – in the marquee www.nottingham.ac.uk/economics

What is Economics? "the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses." Lionel Robbins, 1932, An Essay on the Nature and Significance of Economic Science (and Wikipedia) So, economics is a scientific method. i.e. a particular scientific way of analysing the world around us. A Nottingham-trained, graduate economist will be an expert in using this method. This means that economic science has answers to an enormous range of questions. What are some of these questions….?

Some questions for economic analysis Corporate Finance . . . How much should I pay for a company? What is the optimal level of pollution in our cities? Should the Monetary Policy Committee change interest rates? Why is there a global financial crisis ? What impact does China have on the globalised world economy? Should the UK get rid of Sterling and join the Euro? …and many, many more…

Some questions for economic analysis Corporate Finance . . . How much should I pay for a company? • Human brains are hard-wired to answer such questions • Economic theory explains why we make the decisions we do • Often this is straightforward • But occasionally theory tells us some clever stuff about our behaviour

Some questions for economic analysis Corporate Finance . . . How much should I pay for a company? • Assume I own an under-performing business. • You plan to buy the firm from me, hire new management and improve performance. • By doing this the new value of the business would be 1½ times my current value of it. • If you offer me at least my current value I will sell the business to you. • Trouble is my current value is not known to you, but assume it is equally likely that . . . My valuation could be 0, £1m, £2m, £3m, £4m, £5m, £6m, £7m, £8m, £9m. Example If you offer me £3m and I value it at £4m, I won’t sell the company to you If you offer me £5m, the company is yours and you profit (1.5x£4m)-£5m=£1m If you offer me £7m, the company is yours but you’ve paid too much & lose (1.5x£4m)-£7m=£1m

Some questions for economic analysis Corporate Finance . . . How much should I pay for a company? • Assume I own an under-performing business. • You plan to buy the firm from me, hire new management and improve performance. • By doing this the new value of the business would be 1½ times my current value of it. • If you offer me at least my current value I will sell the business to you. • Trouble is my current value is not known to you, but assume it is equally likely that . . . My valuation could be 0, £1m, £2m, £3m, £4m, £5m, £6m, £7m, £8m, £9m. So you can make profits . . . but losses too. So how much would you offer me for the business?

To address this problem formally we need some logic and a few sums For some details see this presentation on our website It turns out that the profit you can expect on average is . . . Possible Offers: 0 1 2 3 4 5 6 7 8 9 Expected profit: 0 -0.05 -0.15 -0.30 -0.50 -0.75 -1.05 -1.40 -1.80 -2.25 On average, you will make a loss from trading, whatever you offer • The optimal bid is actually zero! • You should not enter in to trade. If you do, you may be lucky and make a profit but on average you will make a loss. • The economic logic (“informational asymmetry”) As a buyer there is insufficient information to sustain profitable trade.

To address this problem formally we need some logic and a few sums It turns out that the profit you can expect on average is . . . Possible Offers: 0 1 2 3 4 5 6 7 8 9 Expected profit: 0 -0.05 -0.15 -0.30 -0.50 -0.75 -1.05 -1.40 -1.80 -2.25 So, although human brains are hard-wired to answer questions of valuation, there are some results that are counter-intuitive While intuition is one thing, there’s no substitute for economic analysis. But if your valuation was actually zero . . . you’re cleverer than you may have thought !

So how will we train you to answer such questions? • We will equip you with the knowledge, skills and techniques of modern and advanced scientific enquiry, as practised by economists. • This involves studying: economic theory quantitative and statistical analysis modelling techniques practical examples of economic analysis Precisely how will we do this ?...

Our Degrees Economics Economics and Econometrics Economics and International Economics Economics with a Foreign Language (Russian, French, German, Hispanic Studies) Economics with Chinese Studies Economics and Philosophy Mathematics and Economics

An Example: Economics (Year 1) • Core Economic Theory Introduction to Microeconomics Introduction to Macroeconomics • Core Quantitative Analysis (A-level maths) or (no A-level maths) Mathematical Economics Quantitative Economics I Introductory Econometrics Quantitative Economics II • Optional Modules European Economic Integration, Introduction to Industrial Economics, Introduction to Environmental Economics (and/or modules from other schools if you want) Lectures, small-group tutorials, seminars, lab classes CHOICE CHOICE

Another : Economics & International Economics • Core Economic Theory Introduction to Microeconomics Introduction to Macroeconomics • Core Quantitative Analysis (A-level maths) or (no A-level maths) Mathematical Economics Quantitative Economics I Introductory Econometrics Quantitative Economics II • Optional Modules European Economic Integration, Introduction to Industrial Economics, Introduction to Environmental Economics (and/or modules from other schools if you want) International Economics I International Economics II and CHOICE CHOICE

What about Years 2 and 3? • Year 2 Same structure as Year 1, with a mixture of compulsory modules and optional modules • Year 3 Choice from a broad variety of modules – tailor your degree to your interests and employment intentions Health Economics, International Trade, Econometrics, Labour Economics, Monetary Economics, Environmental Economics… and many more. • BA or BSc? Some year 2 and 3 modules are more technical than others. These have a BSc label, so those that choose to can graduate with a BSc. • Degree Result Based upon performance in Years 2 and 3 First year is a qualifying year; your ‘finals’ are spread over 4 exam periods and thus you can have a ‘bad day’ and still get First Class Honours!

Why choose the Nottingham School of Economics? • Strength and Depth We are a large school with experts across the spectrum of specialisms within economics. This gives you more choice, makes your degree more flexible and means you are taught by leading specialists. • High Quality Provision - Top rated teaching (24/24 in the QAAHE teaching inspection) - Top rated research (Rated 3rd in UK Economics on ‘Research Power’). - Enviable league table performance. Always top 10, normally top 5. - 1 staff to 16 students – small group tutorials central to our programmes. • Prestigious University - Top 10 in UK - Top 1% in the world - We are World-Class and so will be your education.

Why choose the Nottingham School of Economics? • Excellent Study Environment Guaranteed place in Hall, flexible modular degrees, study abroad opportunities • Take a Semester overseas and experience a new culture • University of British Columbia, Vancouver, Canada • University of Nottingham, Malaysia Campus

Why choose the Nottingham School of Economics? • Graduate Salaries Our graduates are sought after by the best employers and are well paid. Starting Salary, Nottingham graduates 2007 Economics £29,781 Management £23,641 Law £20,272 Geography £20,660 Nottingham £21,603 Source : Nottingham University Careers advisory Service • Various Career Options Investment banking, financial services, accountancy, management programmes in industry, civil service, journalism, teaching and research, NGOs….. • ‘Blue-Chip’ Employers Government Economic Service, JP Morgan, Coutts & Co., Ernst and Young, Credit Suisse, PriceWaterhouseCoopers, Financial Services Authority, Aon, Bank of America . . .

Sound interesting?....What next? • Pick up a School brochure and university prospectus • Visit www.nottingham.ac.uk/economics • Speak to students – our students speak very highly of their time here • E-mail any questions to us: jo.morgan@nottingham.ac.uk • Competition for places is fierce (7 applications per place) • Our standard offer is AAA/AABB (maths preferred). All our offers are made after the mid-January deadline. • If you apply and are offered a place, you will be invited to a School open day – so come and see us again to find out more about our degrees.

and finally… • Whatever you do, go to University! • A life-changing experience and one of the best investments out there Graduate Premium by Discipline (%) Source: Labour Force Survey, HMSO 2007

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The Valuation Problem : Explaining the logic Possible Offers: 0 1 2 3 4 5 6 7 8 9 Expected profit: 0 -0.05 -0.15 -0.30 -0.50 -0.75 -1.05 -1.40 -1.80 -2.25 With seller valuations (v) uniformly distributed with the range £0 to£ 9m, the average seller valuation for any offer (f) is half way between 0 and the offer, so conditional on the offer being accepted, the expected value of the business for the seller is 0.5f and because of his superior management, it is 1.5[0.5f] for the buyer. Bearing in mind that the buyer must pay f, then the expected profit is [1.5x0.5f]-f. Since this is always negative, any positive non-zero offer f will yield a loss on average. A bid of zero, i.e. No offer at all is the optimal offer under standard assumptions about risk preferences. The higher the bid is, it is both more likely that the owner will sell the business to you and that you will make a loss on the transaction (your offer being higher than 1.5 times the seller’s valuation), thus expected losses rise with the bid. Of course, given that there are some combinations of bids and valuations that yield profits, if you happen to be lucky you can make a profit, but on average you would always loose . . . and that’s why you should not enter into trade. Allowing for risk-loving preferences can change things . . . But that’s another story. Where did those numbers come from? The following slides gives an example if you bid £2m but the same procedure can be applied for all other bids. We know that profit is the difference between the new value and the offer. Since the new value is 1.5 times the current value, and the last part is not know we have to perform the calculation over all possible current values, weighting each by probability of occurrence. We are told that each current value can occur with equal probability hence any one will occur 10% of the time on average.

To see how we got the numbers . . . For each offer, we calculate the expected profit. To give a flavour of the analysis, assume you offer me £2m Offers you could make: 0 1 2 3 4 5 6 7 8 9 My current valuation: 0 1 2 3 4 5 6 7 8 9 (each with probability of 0.1) Analytically, we work out the expected profit for each offer over all possible valuations (here zero) Expected profit = probability of current valuation [new value – offer] = 0.1 [(0 x 1.5) – 2 ] = -0.2 Expected profit = (-0.2) +

And then we calculate it for a current valuation of £1m. Offers you could make: 0 1 2 3 4 5 6 7 8 9 My current valuation: 0 1 2 3 4 5 6 7 8 9 (each with probability of 0.1) Expected profit = probability of current valuation [new value – offer] = 0.1 [(1 x 1.5) – 2 ] = -0.05 Expected profit = (-0.2) + (-0.05)

And finally for £2m. Note that I would not sell the firm to you if my valuation was greater than your offer so the calculation below is the last for an offer of £2m. Offers you could make: 0 1 2 3 4 5 6 7 8 9 My current valuation: 0 1 2 3 4 5 6 7 8 9 (each with probability of 0.1) Expected profit = probability of current valuation [new value – offer] = 0.1 [(1 x 1.5) – 2 ] = -0.05 Expected profit = (-0.2) + (-0.05)

And finally for a current valuation of £2m. Note that I would not sell the firm to you if my valuation was greater than your offer so the calculation below is the last for an offer of £2m (but there would more sums for successively higher offers). Offers you could make: 0 1 2 3 4 5 6 7 8 9 My current valuation: 0 1 2 3 4 5 6 7 8 9 (each with probability of 0.1) Analytically, we should work out the expected profit for each offer Expected profit = probability of current valuation [new value – offer] = 0.1 [(2 x 1.5) – 2 ] = 0.1 Expected profit = (-0.2) + (-0.05) + (0.1) = -0.15 i.e. on average you’d make a LOSS of £150,000 if you bid £2m.

Why Study Economics at Nottingham? Dr. Tim Lloyd Associate Professor