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Table of Contents
                            Half Title
Title Page
Guide to Related Topics
Ideas and Concepts
About the Editor and Contributors
Document Text Contents
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Opportunity Costs and Personal Finance
As the world continues to become more complex with resources becoming scarcer, the need to make
sound decisions in all aspects of life will be crucial for individuals, societies, nations, and the world.
As contemporary technology and the ability to become more educated throughout the world through
swift communication are greater than in the past, the importance to think soundly in life’s decision-
making process is crucial for all people.

For example, in the 1960s, the fear of global warming was not in question. Yet today, there is
great concern regarding the future depletion and proper use today of resources. Therefore, the
question is whether countries including the United States make the proper opportunity cost
calculations in their energy and policy choices. A serious consideration would be whether
individuals and policymakers act to satisfy themselves or group agendas. Again, whether opportunity
cost is right or wrong depends on who or what is making the decision.

Over the years, the term opportunity cost will provoke a wide range of responses in reference to
choice. Decisions today differ from those of years past. What an individual or nation gives up when
making a choice continues to impact that person’s as well as that nation’s financial situation.

Scott Glenn

Accountant; Capitalism; Human Capital

Further Reading
Becker, S. W., Ronen, J., and G. H. Sorter. 1974. “Opportunity Costs—An Experimental Approach.”

Journal of Accounting Research 317–329.
Brue, S. L., C. R. McConnell, and S. M. Flynn. 2010. Essentials of Economics, 2nd ed. New York:

McGraw-Hill Irwin.
Crompton, J. L., and D. R. Howard. 2013. “Costs: The Rest of the Economic Impact Story.” Journal

of Sport Management 27(5), 379–392.
Hoskin, R. E. 1983. “Opportunity Cost and Behavior.” Journal of Accounting Research 21(1), 78–

Levitt, A. 2012. The Role of Opportunity Cost in Financial Decision Making.
Spiller, S. A. 2011. “Opportunity Cost Consideration.” Journal of Consumer Research, 38(4), 595–

610. doi:10.1086/660045
Thornton, M. 2003. Richard Cantillon and the Discovery of Opportunity Cost. Accessed from

Pension Plans
A pension plan is a type of retirement program where an employer contributes funds for an
employee’s future benefit. The pool of funds is then invested on behalf of the employee. That allows
the employee to receive benefits upon retirement. A pension plan is usually tax exempt. The two main

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types of pension plans are defined benefit plans and defined contribution plans.

Other Types of Retirement Plans

Defined Benefit Plan
A defined benefit plan promises a specified monthly benefit at retirement. This promised benefit may
be an exact dollar amount, such as $100 per month at retirement. But usually the benefit is calculated
through a formula that considers such factors as salary and length of service. For example, a benefit
might be calculated as follows: it might be computed by taking 1 percent of the average salary for the
last five years of employment for every year of service with an employer. The benefits in most
traditional defined benefit plans are usually protected by federal insurance provided through the
Pension Benefit Guaranty Corporation (PBGC).

This type of pension plan is in contrast with other types of retirement plans whose payouts are
dependent on returns of the underlying investments in the plan. Employees are required to work for a
certain period of time (called a vesting period) before they are eligible to receive benefits in a
defined benefit plan. In addition to a monthly payment, these pensioners frequently received a health
care insurance plan. In many cases, these benefits were on top of the Social Security benefits the
retiree received.

These plans were established in the late 1800s, according to Seburn (1991) in “Evolution of
Employer-Provided Defined Benefit Pensions.” The early pension plans covered workers in the
railroad, banking, and public utilities industries. In 1974, the Employee Retirement Income Security
Act (ERISA) was enacted to protect employees’ benefit rights in private pensions.

By the 1980s the private pension system assets expanded exponentially. In spite of the growth of
the assets in the defined benefit pensions, during the mid-1980s the medium- and large-sized
companies that offered these plans began to shift toward private plans that were financed completely
by the employees. Since these defined benefit pensions became very expensive to administer, new
retirement savings options became available.

Furthermore, with the increase in smaller, service-oriented firms, the number of employer-funded
retirement pensions decreased. Today, the individual who works for the same company throughout his
or her career and receives an employer-sponsored pension is rare.

Defined Contribution Plans—401(k) and 403(b)

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trusts, 246; living trust, 245, 246; pet trusts, 247; probate court, 245; qualified terminable interest property trust, 247; revocable trusts,
246; special needs trust, 247; specialty trusts, 246–247; state law and, 245; testamentary trust, 246; trust, definition of, 245; trustee,
245; trustor, 245; trusts, 246; will, definition of, 245; wills, 245–246

Wittstein, Theodore, 122
women in the workforce, 258–259
Woolley, Jennifer L., 380
Works Progress Administration, 83
WorldCom, 281
World Health Organization, 125

Year 1930s: the Great Depression, 249–252; banking, 250; Black Tuesday, 249; causes of, 251; comparisons to, 251; dates of, 249;
duration of, 249, 251; end of, 251; Federal Deposit Insurance Corporation (FDIC), 250; Fireside Chat, 250; Great Recession (2008–
2009), 251; margin trading, 249; New Deal, 251; new programs coming from, 250–251; overview of, 249; recession, definition of, 251;
Roseville, Franklin Delano, 250; Securities and Exchange Commission (SEC), 250; Social Security and, 251; stock market crash, 249–
250; Tennessee Valley Authority, 251; unemployment rate, 249; unemployment rate of, 251

Year 1944: Creation of the International Monetary Fund and the World Bank at the Bretton Woods International Conference, 252–256;
Bretton Woods, end of, 255; Bretton Woods Conference, 253–254; floating currency, 255; gold standard, 253, 254, 255; International
Bank for Reconstruction and Development (IBRD), 254–255; International Monetary Fund (IMF), 253, 254; Keynes, John Maynard,
253; Marshall Plan, 255; Nixon, Richard M., 255; postwar events and, 255; Special Drawing Rights, 255; U. S. leadership, 253; White,
Harry Dexter, 253

Year 1970s to 1980s: economic problems and the United States, 256–259; dollar, appreciation of, 258; energy shock of 1979, 257;
factors contributing to inflation, 257; food prices, 257; historical awareness in personal finance and money management, 260; inequality
in American society, 258–259; inflation, 256–257, 258; interest rates, 257; job creation, 258; mortgage interest rates, 257; oil prices,
257; overview of, 256–257; political turmoil and, 257; President Reagan’s government and economic policies, 257–258; social
consequences, 258–259; trade deficit, 258; unemployment, 258; women in the workforce, 258–259

Year 1987: stock market crash, 259–262; Beattie, Andrew, on, 260; Black Monday, 259; causes of, 260; computerized trading, 260;
Federal Reserve Bank response to, 260–261; “follow the herd” mentality and, 260; historical awareness in personal finance and money
management, 260; insider-trading allegations and the SEC, 260; liquidity, increasing, 261; long-term effects of, 261; overview of, 259;
subsequent response, 261; theories about, 260; tools used by the Fed in, 261

Year 1989–1991: U. S. savings and loan crisis, 262–264; amount of assets in, 263; consequences of, 262; corruption and, 263; deceit
and lies, 263; deposits, 263; deregulation and, 263; “The Great Inflation,” 263; impact on hometown depositors, 264; initial failures, 263;
interest rates, 263; maturity mismatch in, 263; number of failed S&Ls, 264; number of S&Ls in 1980, 263; overview of, 263–264;
political influence and, 263; reasons for, 262–263; Regulation Q, 263; risk taking, 263; S&Ls, definition of, 263; significance of, 263,
264; total cost to taxpayers, 264

Year 1994: North American Free Trade Agreement between Mexico, Canada, and the United States (NAFTA), 264–268; analysis of
NAFTA– pros and cons, 265–266; assessment of by economists, 266; benefits from NAFTA, 266; Council on Foreign Relations on,
265; free trade policies benefits, 267; future of NAFTA, 267; historical impacts of global economic change, 266–267; international
trade barriers, 265; labor unions and, 266; negative employment repercussions, 266; supply chains and, 265, 266; U. S.-Canada trade
and, 265, 266; U.S. Congressional Budget Office on, 265; U. S. free trade partners (other), 267; U. S. income losses, 266; U. S. labor
market, NAFTA’s impact on, 266; U. S.-Mexico trade and, 265, 266; worker protection, 267

Year 1997–1998: Asian financial crisis, 268–271; aftermath of, 268; alternative name for, 268; baht, devaluation of, 269; capital
adequacy, 269; CNN Money. 1997. “Thailand Floats the Baht.,” 269, 271; corruption, 269; currency crisis impacts corporate and
banking sectors, 270; currency crisis in Thailand, 269; currency devaluation and, 269; devaluation, key effective, 269; financial and
asset price crises, 270; foreign capital inflows, 269; implications of a devaluing currency, 269–270; international lenders and, 268;
International Monetary Fund bailouts, 270–271; liquidity crisis, 270; loss of confidence, 269; misallocation of resources, 269; origin of,
268–269; overview of, 270–271; political interference, 269; rate of return on capital, decline in, 269; spread of, 269; “subsidized”
private projects, 268; Thailand, 268, 269

Year 1999: introduction of the euro to world financial markets, 271–274; additional usage of the euro, 273–274; benefits of, 272; Bretton
Woods system, 272; conversion rate for, 273; countries using, 273–274; currency “snake,” 272; deutsche mark, 274; education
campaign for, 273; euro defined, 271; European Central Bank, 273; European Currency Unit (ECU), 272; European Economic
Community, 272; European Monetary System (EMS), 272; European Union and, 272, 273; euro zone, 272; Exchange Rate Mechanism
(ERM), 272, 273; future of the euro, 274; Germany and, 273, 274; historical background, 272; implementation of the euro, 273;
Maastricht Treaty (1992), 272; market response to, 273; monetary union, plans to create, 272–273; notes and coins, design of, 273;
retailers and, 273; stability of the euro, 274; U. S. dollar and, 274

Year 2000: bursting of the dot-com technology bubble, 275–277; behavioral economics and, 277; behavioral finance and, 275–276;
budget deficit reduction, 275; budget deficits, 276, 277; current accounts and, 276; efficient market theory, 275; factors creating the
technology stock bubble, 275; framing, 276; Greenspan, Alan, 276; herd mentality, 275, 276; Intel (INTC) stock example, 275;

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international stock prices, increases in, 275; Keynes, John Maynard, 276; Minsky, Hyman, 276; National Bureau of Economic
Research on, 276; productivity, downturn in, 276; productivity, perception of, 275; run up in stock prices, 275; stock market psychology,
275–276; summation of, 277; theory concerning, 276–277; upward stock market trend reversal, 276–277; U. S. stock market
capitalization, 275

Year 2001: Enron, the failure of corporate finance and governance, 278–280; Arthur Andersen, 278; Chief Executive magazine on
Enron, 279; corporate governance and risk management, 279; creative accounting, 279; criminal investigation, 278; Enron board of
directors, 278; ethical, political, and other accounting issues, 279–280; formation of Enron, 278; Lay, Kenneth, 278; market-to-market
accounting, 278; overview of, 278; reasons for, 279; regulation and oversight, increase in, 280; Sarbanes-Oxley Act and, 280; SEC
investigation, 278; sell-off and bankruptcy, 278; Skilling, Jeffrey, 278, 280; “the snowball,” 280; special-purpose entities, 278–279

Year 2002: Sarbanes-Oxley Act, 280–282; congressional support for, 282; criticism of, 282; effects of, 282; enactment of, 280; Enron
and, 281; fraudulent financial data, 282; greed, 282; naming of, 281–282; reasons for, 281; sections of, 282; summation of, 282; support
for, 282; Tyco and, 281; WorldCom and, 281

Year 2003–2011: Iraq War’s impact on the U.S. economy, 283–285; Baker, Dean, on military spending, 283; Bush, George W., and,
283; cost to the military and related population, 284–285; cost to U. S. citizens, 284; employment and, 284; federal budget deficit and,
284; Foldvary, Fred, on, 283, 285; future generations and, 284, 285; government accounting and reporting of, 285; intangible economic
costs of the war, 284; oil prices and, 284; opportunity costs of war, 283–284; overview of Iraq War, 283; problems calculating the cost
of the Iraq War, 283; returning military costs, 283, 284, 285; returning veterans, 284; tangible and intangible economic costs, 284–285;
The Three Trillion Dollar War: The True Cost of the Iraq Conflict (Stiglitz and Bilmes), 284, 285; war casualties, 284

Year 2005: growth of China and India as world economic powers, 285–288; Agreement on Trade in Goods, 286; China, currency policy
change, 286; China, economic growth of, 285–286; China, exports/imports increases, 286; China, foreign direct investment (FDI)
opportunities, 286; China, international relations, 286; China, private firms, 286; India, economic growth, 287; India, employment
reform, 287; India, FDI and infrastructure industries, 287; India, fiscal reform, 287; India–U. S. Civil Nuclear Agreement, 287;
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA), 287; Open Skies Agreement, 287; overview of, 285;
renminbi (RMB), 286; state-owned enterprises (SOEs), 286; summary of, 288

Year 2007–2008: subprime housing crisis and mortgage meltdown, 288–291; adjustable-rate mortgage (ARM) and, 289–290; bundled
mortgages, 289; causes of, 289; consequences of, 291; contributing factors to, 290; the crash, description of, 290–291; foreclosures,
290; Glass-Steagall legislation, 289; the Great Recession and, 291; home mortgage debt, growth of, 290; mortgage-backed securities
(MBS), 289, 290, 291, 293; overview of, 288–289; rating agencies as contributors to, 56, 291; “Subprime Mortgage Crisis” (University
of North Carolina) report, 290, 291; subprime mortgages, 289; summary of, 291

Year 2007–2009: global recession and breakdown of major Wall Street institutions, 292–296; capitalism and, 295; countries affected by,
295; “credit crunch,” 294; crisis becomes international, 295; date of recession in the, 295; developing economies, effect on, 295;
economic climate proceeding the crisis, 292–293; extent of, 295; factors contributing to, 292–293; failed institutions, 294; Fannie,
Freddie, and Ginnie Mae, 294; foreclosures, causes of, 292; Global Financial Stability Report (IMF), 294; government intervention,
294–295; impact on real estate in banks, 293–294; mortgage-backed securities (MBS), 293, 295; oil prices and, 295; overview of, 292;
quantitative easing, 294; rating agencies as contributors to, 293; rationale involved in, 293; securitization, 293; special-purpose vehicles
(SPVs), 293; Troubled Assets Relief Program (TARP), 294

Year 2010: Dodd-Frank Wall Street Reform and Consumer Protection Act, 296–299; Bank Savings Association Holding Company and
Depository Institution Regulatory Improvement Act (2010), 297–298; Bureau of Consumer Financial Protection and is known as the
Consumer Financial Protection Act (2010), 298; criticism of, 296; Dodd-Frank Act, breadth of, 296; Enhancing Financial Institution
Safety and Soundness Act of 2010, 297; Federal Deposit Insurance Corporation (FDIC), 297; Federal Insurance Office Act of 2010,
297; Federal Reserve System Provisions, 298; Financial Stability Act of 2010, 296; Financial Stability Oversight Council, 296, 297;
Improving Access to Mainstream Financial Institutions Act (2010), 298–299; Investor Protection and Securities Reform Act (2010),
298; Mortgage Reform and Anti-Predatory Lending Act, 299; Office of Financial Research, 296, 297; Orderly Liquidation Authority,
297; overview of, 296; “Pay It Back Act,” 299; Payment, Clearing and Settlement Supervision Act (2010), 298; Private Fund
Investment Advisers Registration Act (2010), 297; reason for, 296; Title I, 296–297; Title II, 297; Title III, 297; Title IV, 297; Title V,
297; Title VI, 297–298; Title VII, 298; Title VIII, 298; Title IX, 298; Title X, 298; Title XI, 298; Title XII, 298–299; Title XIII, 299;
Title XIV, 299; Title XV, 299; Title XVI, 299; Volcker Rule, 297–298; Wall Street Transparency and Accountability Act (2010), 298

Year 2011–2012: European debt crisis, 299–302; 2007–2008 world financial crisis and, 299; Austria, 300; bank refinancing, 301;
Belgium, 300; Cyprus, 301; euro bonds, 301, 302; European Central Bank problems, 301; European Economic Community, 300;
European Stability Mechanism (ESM), 301; France, 300, 301; Germany, 300; Germany and euro bonds, 302; Greece, 300; Ireland, 300;
Italy, 300, 301; Maastricht Treaty of 1992 (Treaty on European Union), 300; military expenditure and, 300; Netherlands, 300; overview
of, 300–301; Portugal, 300; precursor to, 300; resolution, 301; Spain, 300, 301; summary of, 302

Yellen, Janet, 15th chair of the U.S. Federal Reserve Board, 343–345; awards and honors to, 344; date and place of birth, 343; early
career of, 343; economic policies of, 344; education of, 343; The Fabulous Decade: Macroeconomic Lessons from the 1990s, 343;
as first woman chair of the Federal Reserve, 344; as governor of the Federal Reserve Board, 344; husband of, 343; main priority of,
344; parents of, 343; presidential appointments of, 343, 344; reputation of, 343; son of, 343; “Who Is Janet Yellen?” article, 343;
writings of, 343

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