Now we proceed with drafting a model of private information. Now, What assumptions will we have to make in order to describe that in a form that allow us to draw some positive conclusion? Well, first of all, We will ignore, The time value of money. Namely, we will put that the risk-free rate is equal to zero. You will say, well, how come? The time value of money is the core concept of finance. Well, I'm saying, indeed, it is, but for the purpose of this course, we can easily put it this way. So we will be sort of in a reference system, in which we do not take into account this risk-free rate. Why is that so? Because we will also assume that, in general, investors are risk neutral. I will put that assumption just a little bit below. Now, the next assumption here is that how would we treat risk. Risk will be treated as a set of outcomes, Namely, high or low states. So we will say that in the future, that can be a high state and a low state, and they are different in terms of probabilities and cash flows, and that will encompass the whole universe of outcomes. So combined with the first assumption, we will see that we avoid discounting, and we calculate the value of projects based on just the future outcomes and the cash flows in an arithmetic way. Well, these assumptions, they are not core. We could still incorporate the time value of money here, but these calculations would really obscure the core issues. And that would make us do something unnecessary, and that is the methodological way, is not the best idea. Because that really masks the core story, and that is, for us, the most important. Now, the next thing is that, like I said, Investors, Are risk neutral. What do I mean by this? That means that if an investor invests in a risky project that has an expected NPV of, let's say, one. And then invests in another project that is riskless and has the same NPV, then they are indifferent. Well, this is a huge assumption, and that obviously cannot be observed in reality, but for us, it'll be quite helpful. Now the next thing is that investors, they make the decisions based on the maximization of their expected utility. In most cases, in this course, we will take their future cash flows or income as a proxy for expected utility. It will not be always the case, but these exceptions will always support the rules. So we'll put maximize, Expected utility, And that is all about basic investors. And now comes the final, but, by far, the most important assumption that I'll put here. That is, I will put it in a strange way, unobservability. That means that in each transaction and in each project, the party that controls or manages this project does have the information about the future outcomes. While the person who gives money for that does not. If we recall, this picture from the last episode, in which we saw these blue money bags, and then businesses, and then skyscrapers in between. We can say that this picture basically describes the idea of other people's money. So we take someone else's money, we use that in our projects and businesses. But these people who give this money, they have limited, or in some cases, no control of what we do with this money. And that basically will mean that in the presence of unobservability when these parties are sort of divided by the absolutely non-transparent wall. This is the way by which we will be able to analyze private information, because it is the existence of this private information that builds up this wall. And that is from where all the problems that exist in these markets, they actually take their origin. So given these assumptions, although they might sound strange and messy, in starting for the next step. So we will start to apply that to some very simplistic cases. And we'll immediately see how they will allow us to sort of pinpoint these problems caused by private information, and to identify potential damages of that, or resulting from that. That's what we will do starting the next episode.