[MUSIC] In this video, I'm going to introduce a simple categorization of the origins and causes of financial crisis. In particular, we're going to answer the question, what causes these sharp drop in asset values that we observe during financial crisis, these market crashes? To do that I would like to show you a graph that depicts the evolution of the stock market in the US since 1950 up to today. As you can see, there are two lines on that graph. The blue line shows the performance of an investment in the US stock market, taking into account the dividend payment, not just the capitalization gain. So not just the changes in stock level, but also the fact that holding a stock generates a payoff in the form of a dividend payment. So, the blue line has the dividend and the capital gains. The red line only has the capital gain. As you can see, the return, taking in to account the dividend, is order of magnitudes larger than the return, only taking in to account the capital gains. What I want to show you by this, is that the accumulation of wealth that we can observe by investing in the stock market mainly comes from the actual dividend payment, the cash flow that the firm is distributing to its owner. The price of the stock reflects this fact. The stock is the present value of all future dividends. Because future dividends are uncertain, this is an expected value. And this is how we're going to categorize these two sources of crisis of market crash. The first category of major financial draw down is a shock on productivity or technology that directly affect the dividend. We will look at such an example in the following videos. As we mentioned before, prices reflect information. The information that pertains to the valuation of stocks is related to their future dividends. Price can be inflated if the expectation or the anticipation of future dividends are overly optimistic. We would then say that a security or an index is over-valued. We call this situation when the stock does not reflect the true fundamental value of the underlying, but merely the over optimistic anticipation of the market participant, we call this situation a financial bubble. When the bubble bursts and prices fall back to their fundamental value we observe a sharp drop in the index of stock valuation. And this could constitute the second category of crisis. We will, of course, also discuss such an example in the following videos. The simple categorizations seems to distinguish two different origin of crisis, but usually, these things happen together. This is precisely what we've seen during the recent global financial crisis, where real shocks collided with overly optimistic anticipation about the performance of the real estate market. In one of the videos we will discuss the global financial crisis and its ramification. [MUSIC]