My last piece on teaching finance the hard way received a large number of interesting and valuable comments and I shall try to respond to them in this post.
Sahil is right that the quality of finance teaching leaves a lot to be desired. In my view, however, this is a result of the rapid growth of the financial sector in recent years. My simplistic way of looking at this is that if a fraction h of the people in a profession become educators and each educator can educate k people in a year, then the sustainable rate of growth of the profession is given by the product hk. In recent years, we have tried to grow the finance profession much faster than hk.
There are two ways to do this. First is to increase h by bringing in people who are not good educators. I recall a similar thing happened in the software field a few years ago. A programmer friend of mine went to an IT institute to enroll in a course, and they took him on as a faculty member instead. The second route is to increase k by reducing the depth and number of courses that a person is required to take before qualifying as a finance professional. Such an approach leaves the keen student thoroughly dissatisfied as Sahil explains in his comment.
As the growth rate of the financial sector slows down, I see this problem solve itself. It should now be possible for fewer (and hopefully better) teachers to teach in greater depth to smaller classes as I suggested in my last post.
I agree with Gaurav that Minsky is somebody that all finance professionals should have read. I recall reading Minsky before I had studied any serious finance and my impression is that this is a book that any serious student can read on his or her own and I doubt whether a course is needed on this. If at all it is to be taught, I think this is more economics than finance; perhaps, it should be taught along with a course on Austrian economics. (Yes, Paul Krugman thinks that “the Austrian theory of the business cycle is about as worthy of serious study as the phlogiston theory of fire”, but I do read the Austrian Economists’ blog).
Balu Kanchappa complains that finance case studies prepared at management schools have lot of bias in favour of institutions and context – the writers of the case studies focus more on ‘practice’ than ‘principles’. What the case writers do is less important than what happens in the class discussion. The case method is about applying theories to specific situations and so a large amount of detail is required. There is advantage in using cases from different geographies and different time periods so that students acquire the ability to apply broad principles to any context in which they might have to work.
Finance Guy takes issue with my reference to the mass market. What I had in mind was what I have described above as k. I was not talking about the quality of the students at all. There was a problem in the quality of the faculty (the expansion of h) and there was a problem in terms of the interest of the students in the subject. I do not think that there ever was a problem with the quality of the students. When I talked about the mass market, I was referring to the attempt to increase k by having broad brush courses that cover a large number of topics superficially. This makes it impossible to cover topics in depth.
At a personal level, I would also like to add that to a crass materialist like me, “mass” is not a pejorative term at all. Also, I have no desire to contribute to the production of “leaders”; in fact, my deep preoccupation with free markets is partly a rebellion against leadership of all kinds.
Both Finance Guy and Hemchand believe that there is a role for intuition and gut feeling in finance. This may or may not be true, but intuition is not something that can realistically be taught, and my post was about the teaching of finance. I was not and am not writing about what skills you need to succeed in finance.
Finally, I do not believe in the “infallibility” of models; on the contrary, the thing that I like most about models is that they describe their own fallibility and limitations explicitly and openly. And, I like to use models in the plural implying that there are several models each of which has a different restricted domain of applicability rather than one grand “theory of everything”.