Financial Concepts

Concepts

There are different principles that deal with different concepts in finance. Guillermo Navallez is a furniture store owner who had a successful business but it no longer in that position. He has to decide based open these concepts and principles, how he would be able to most likely succeed with his business.

The principle of self-interest behavior applies to Guillermo Navallez by him making his decisions based on what will get him financially ahead. Since there is competition, he is looking at the different options available to him, like switching to distribution from manufacturing or consolidating into a larger organization. His behavior in what he chooses for his company will ultimately come down to what can make him the most profit. In other words he looks at the opportunity cost of what he is doing now versus the difference he could be making if he were to switch.

The principle of two-sided transactions is mostly based off of a zero-sum game. According to Emery, Finnerty, and Stowe (2007), “A zero-sum game is a situation in which one player can gain only at the expense of another player. In these situations, my gain is your loss, and vice versa” (p. 22). Navallez knows that he has competitors and therefore knows not to underestimate their capabilities because in doing this, he will be put out of business.

Two other principles are the signaling principle which looks at other’s behavior to interpret what is going on and behavioral principle where people look at what is going around giving them guidance on what to do. With the signaling principle there could be the adverse selection, which has a negative effect. With behavioral principle, it has a potential of leading to a free-rider problem.

Having different options available will allow Navallez to make decisions that will fit best for his furniture store. By choosing what he would like to do for the success of the store, he can then have incremental benefits along with sunk costs that he...