Prof. Jayanth R. Varma's Financial Markets Blog

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Prof. Jayanth R. Varma's Financial Markets Blog, A Blog on Financial Markets and Their Regulation

© Prof. Jayanth R. Varma
jrvarma@iimahd.ernet.in

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Mon, 29 Dec 2008

Teaching finance the hard way


I was recently asked for my views on whether and how we should change the way we teach finance after all that we have seen in 2007 and 2008. Some of my thoughts are as follows.

In short, I believe finance teaching particularly in MBA courses during the early and mid 2000s became too soft and easy to cater to the needs of an ever growing body of students who sought a career in finance without any real aptitude for the subject. We dumbed finance down for the mass market. The time has come to go back to teaching finance the hard way – and perhaps there will be fewer students in the classroom.

Posted at 14:39 on Mon, 29 Dec 2008     13 comments     permanent link

Comments...

Sahil wrote on Mon, 29 Dec 2008 15:42

Re: Teaching finance the hard way

Dear Professor,

This is very well written. The academic committees at the IIMs would do well to take this piece into account when discussing the relevance, and I would go as far as to say - the rigor of the current finance curriculum.

I remember when we were taught derivatives, the portions on Ito's lemma and martingales were skipped completely. Also - when a few of us raised questions on fat tailed distributions and non-linear dependence structures, we were informed that these were far too sophisticated for a basic class on financial derivatives - in essence, we were advised that the marginal effort needed to understand models based on fat-tailed distributions was not worth it: in retrospect, a dangerous piece of advice.

The other issue from a student's perspective is that there are few (very, very few) instructors capable of teaching advanced classes in finance. As students, the number of times one is let down by teachers not only limits understanding but also dampens curiosity.

But then, as you point out, these are strange times. Perhaps we have reached a tipping point.

It would be especially good to have your thoughts on the second issue, as someone who has taught finance for so long.

Regards.

Sarbvir Singh wrote on Mon, 29 Dec 2008 21:06

Re: Teaching finance the hard way

Dear Prof. Verma,

You have really written a very balanced and insightful piece. I hope that the powers-that-be will take note and incorporate your suggestions.

On a personal note, reading your super blog makes me feel really sorry that I did not have the opportunity to take any of your courses!

Regards,

Sarbvir

Balu Kenchappa wrote on Tue, 30 Dec 2008 10:43

Re: Teaching finance the hard way

I largely agree with Prof. Verma. The problem remains to be that of 'how to ensure right mix of behavourial issues, long range quality data and skillful factoring of then prevailing macro-economic environment' in to the modelling exercise. History suggests that it is not so easy to develop such a robust models for on the field application, leave alone for class room experimentation. The real challenge lies in ensuring that the model is contemporaneous with back testing abilities and success. While I agree with Prof. Verma when he says that "we must emphasize functions and not institutions; concepts and not context", I do get an impression that finance case studies prepared at management schools has lot of bias in favour of institutions and context. It appears to me that the writers of the case studies focus more on 'practice' than 'principles'.

Balu Kenchappa wrote on Tue, 30 Dec 2008 13:22

Re: Teaching finance the hard way

I largely agree with Prof. Verma. The problem remains to be that of 'how to ensure right mix of behavourial issues, long range quality data and skillful factoring of then prevailing macro-economic environment' in to the modelling exercise. History suggests that it is not so easy to develop such a robust models for on the field application, leave alone for class room experimentation. The real challenge lies in ensuring that the model is contemporaneous with back testing abilities and success. While I agree with Prof. Verma when he says that "we must emphasize functions and not institutions; concepts and not context", I do get an impression that finance case studies prepared at management schools has lot of bias in favour of institutions and context. It appears to me that the writers of the case studies focus more on 'practice' than 'principles'.

Siddharth Surana wrote on Wed, 31 Dec 2008 12:38

Re: Teaching finance the hard way

Very well put Prof. When things are going good, people tend to get euphoric and assume that this'll last forever. Finance is not a 'soft' area like H.R. or O.B. it's a highly specialized field and that's how it should be.

Hemchand J wrote on Wed, 31 Dec 2008 20:21

Re: Teaching finance the hard way

Sir, I read your writing with great interest. I agree with your views on the infalliability of models but history has also taught us that modelling is not everything. There still remain certain areas of finance which have to be mastered the hard way. Which cannot be taught by brilliant mathematicians. There are certain areas (like valuation of assets ) which cannot be totally quantified and it will be wrong to teach students financial modelling alone neglecting the tenets of banking.The crisis of 2008 has taught us to include the risk of uncertainty in our list and not to forget the spirit of finance and human factor while dabbling in banking.

Finance Guy wrote on Thu, 01 Jan 2009 11:28

Re: Teaching finance the hard way

Fairly well put but I disagree with your extreme emphasis on modeling and reliance on historical data. Those of us who work in the industry that modeling and data can only get you so far..Ultimately, we are driven by gut feel and psychology and that has not and will never change.

However, the thing that I take greater issue with you in your post is : "We dumbed finance down for the mass market"..If as a professor, you cannot explain your concepts to the mass market, then I don't believe you are that great a professor quite honestly. I have had the benefit of being taught by esteemed professors in both India and the US. And in my honest opinion, the biggest difference was the attitude of professors towards their students. Indian professors live in their own shell of elitism and have a very hard time connecting with their students. The students who come out of such classes tend to know the class well but can rarely apply those concepts in a more extensive sense. Consequently, we as a country don't produce "mass leaders" the way we need to..

Harsha wrote on Fri, 02 Jan 2009 04:56

Re: Teaching finance the hard way

Dr Verma,

Although the concerns raised are valid,I agree to a large extent with Finance Guy.I have a masters degree in financial engineering and i have studied in-depth all the mathematics you mention.But it was quite a revelation when I started trading derivatives in my first job.Even if you model fat tails,liquidity effects etc,it is always a struggle between keeping the model simple enough to be intuitive and fitting as broad a range of market instruments as possible.Nothing can replace comprehensive knowledge of markets,institutions and players.Financial models merely provide a way of thinking about valuation and hedging issues.It is dangerous to think of them as anything else.



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