Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

More on teaching finance

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


One response to “More on teaching finance

  1. Mahesh January 2, 2009 at 12:00 am

    dear Mr.Varma,

    I had studied MBA Finance from The IIPM, New Delhi during 1999-2001. We had really great professors in our stream including names like Dr. Raj.S.Dhankar, Dr. Naresh Gupta, Mr.Navneet Kampani, etc who are famous in their own rights. Although, I do not recommend the course to anybody as the institute is quite run-of-the-mill stuff but, there are some remarkable senior professors. I remember Mr.Kampani giving a select few students including myself, IIMA finance modules. We were stunned to see the depth and also the practicality to the industry of those modules, which I believe would have been from yourself or one of your colleagues.

    Now, coming to the point of the current post of teaching finance, I would like to highlight a few aspects of the system in practice:

    1) Assumptions – the models followed are based on very short term data making various assumptions which often have the limitations of not having passed the test of time

    2) Securitisation – unlike the traditional models, the securitisation model of increasing revenues is absolutely impractical which we are finding out the hard way now with the sub-prime crisis

    3) Risk Management – macro models suggesting the risks can be spread far and wide and the whole system becomes safer is another grey area

    4) Hedging – the use of derivatives for mitigating risks is another fallacy as every contract comes with a cost sometimes very steep premiums like what is happening on the CDS protection front right now.

    As long as, the above mentioned “financial re-engineering” topics are the most glamourous fields in finance in institutes, we have a problem.

    Funding is a risky activity and a conservative and traditional method of appraising risks is the most reliable for successful results over the long term. When the points I mentioned are understood by the professors and students, learning finance becomes much easier but loses its glamour in a way. Leading MBA schools now are playing with the field of finance as it is some marketer’s finance who hardsells his worthy or unworthy models to others to get recognised or make money. If we could take finance as a conservative subject, the industry would not come to the situation that we are in today.

    Regards and Best Wishes for a prosperous 2009!
    Mahesh V.Pillai

    PS: I am a stocks trader and do not know anything deeper in any of the areas I mentioned. The objective of my comments were to bring to notice the failed assumptions of the modern day finance as per me.

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