I recently returned to teaching Investments in a graduate business program.
In an effort to make the coursework as relevant and hands-on as possible, I arranged for student access to a simulated stock trading platform, which allows participants to trade many stocks, along with some bonds, futures, and other financial instruments, in a realistic environment.
To my surprise, I discovered that over two thirds of the class had never traded a financial instrument before in their lives. While this may not be unusual for a randomly selected group of people, the course in question was Advanced Portfolio Management. Despite professed interest in business, completion of undergraduate programs in economics, commerce, and related disciplines, as well as a number of introductory and intermediate graduate level courses in finance, the majority of the students in the class had not been exposed to a very basic set of experiences.
In several months, these graduates would be taking their higher education credentials and joining the finance professionals community.
The point here is not to criticize students of finance, but rather to (anecdotally) highlight deficiencies in the system of education and to shed some light on how we got into this financial crisis: generations of MBA and Masters of Science in Finance graduates have been joining the work force with deep gaps in their knowledge.
Is it any wonder that the average financial markets professional lacks a complete understanding of his or her job, and is therefore unable to fully understand the implications of his or her mistakes?
More to the point of this blog: if the professionals are so ill-prepared, what hope is there for the average person on the street?
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Regarding ill-preparedness of the professionals, the problem starts with the admissions criteria at universities. A GMAT or GRE can not measure a student's knowledge and expertise in a particular field. The admissions office for an MBA or Finance program does not know whether a student can tell you which stocks trade on the Dow Jones, or even what the role of a floor-trading specialist is.
ReplyDeleteThe admissions office is going to sort out applicants based on first GRE scores and then GPA. Only students on the bubble that have already gotten near the required GRE score range will have their C.V. play as a major admissions factor.
There are a few select schools that will waive the GRE and GMAT for its MSF applicants based on having significant work experience. Such a policy may open doors for finance professionals who do not have time to study for the GRE/GMAT but have lots of hands-on/trading experience.
I believe that curriculum has a lot to do with student preparedness in a graduate-level Advanced Portfolio Management course. Courses leading up to an Advanced Portfolio Management class should have covered trading and hands-on investing, such knowledge would help for personal wealth management at a minimum. I am over half-way through a finance program and am yet to attend a lecture that teaches wager-management, which I believe is the core of investing. The notion that, in a year, a stock can go from $5 to $3 and back to $5, and the investor could have made money, simply by not throwing-it all-in at once. So many investors do not inch-into their positions, which results in big gains and big losses.
I came across your blog as a function of someone who attend one of your classes. I find it very interesting that you take the position (at least it is implied) that "poorly prepared finance professionals" are somehow partially/fully responsible for the melt down that has occurred in the financial sector around the world and your sole premise is based on your observations in a classroom you taught after becoming a lecturer to wit you have had years of experience in finance.
ReplyDeleteI guess we should definitely not blame the crop of smart/stupid people who have years of experience in the financial markets, and often time attended prestigious schools, that were running these companies at a ridiculous rate of leverage and were definitely considered “adequately prepared finance professionals” (I am sure the risk management professionals at those companies, who could or could not be finance professionals, warned these CEO’s about the impending disaster but since they were so “adequately prepared” they ignored it); I think you see where I am going with this because I think your logic is severely misplaced; I will further explain myself.
1. Not all finance professionals want to engage in the financial/stock exchange market. It will be nice if they did (mostly to broaden their knowledge and have a good working knowledge of the financial markets) but all finance people don’t have to trade derivative or even own individual stock besides their 401k, which is really been managed by another gang of “adequately prepared finance professional”. “ Advanced Portfolio Management” might not be their personal preference for a careers, also, they might want to pursue other areas of finance such as corporate finance or any form of operational financial analysis/management.
2. The name of the course could be appealing to any student or simply a requirement for graduation. If an individual wants to focus on financial markets, it will be advantageous to learn about the financial markets before they take the class, but by and large most students could take the class because of the curiosity factor, which will enable them to decide if they want to pursue the branch of finance that deals with portfolio management. That does not make them “poorly prepared finance professionals”; It simply make them curious and eager to learn. Also, a university/college (undergrad or masters) is a learning environment that fosters teaching so if I may suggest, help your students get excited about “ Advanced Portfolio Management”
3. I don’t know the make up of your class but if you expect newly minted undergraduates or people from other disciplines that might be changing careers to have an “adequate” knowledge of the financial markets before taking your class then I suggest you prerequisite this course with “adequately prepared finance professionals” and probably 10 other classes on portfolio management before you enroll any students in your class.
My points is simple, you should not make generalizations about how the state of finance professionals based on one class (definitely not your class because the sample is to small) and more importantly, all finance professionals don’t have to care about the financial markets or portfolio management unless it is an area of concentration/career path for that student…even at the 500 level.
Lastly I agree with your first blog about “To Big To Fail”…that terminology does not exist in my language.
This is a response to the May 11th comment by "Anonymous."
ReplyDeleteI get the impression that you have taken my comments very personally so a few clarifications are in order. First, the blog entry is not meant as an insult to members of the class. It is a criticism of the education system, not the students. You will note from my other blog, http://leadershiprisk.com/blog, that I have consistently been a loud critic of business programs, and especially the most prestigious. Second, blogs are informal, often written quickly and may not be well-researched or edited, and often are based on half-baked ideas, including generalizations. I don’t claim to have incorporated all the relevant arguments and considerations in my short article, and I thank you for your thoughts.
I base my comments not on a single class of students, but on a decade of interactions with people in the finance industry who lack important skills and experiences because they didn’t learn them as students. You introduce “adequately prepared professionals,” blaming them for excessive leverage and other poor decisions, and you are absolutely correct. But you seem to claim that I’m ignoring them. In fact, these are exactly the people I am referring to as “inadequately prepared,” and my argument is that at least part of the reason they are inadequately prepared is that their education was not sufficiently broad. The lack of basic hands-on trading experience is just one potential educational deficiency of finance professionals.
In response to your specific observations:
1. I would argue that graduates of finance programs should have some hands-on experience managing their own trading accounts precisely because 401K money may be managed by gangs of inadequately prepared professionals. In fact, my position is even more extreme than that. I believe that all people (not just finance professionals) should have a basic level of financial literacy which includes some experience (even if based only on simulations) in trading. I believe these experiences should begin at the high school level for students between the ages of 14-18. Because I see investment literacy as a basic requirement of all young adults, I am even more demanding of those who choose to go into the field of finance.
2. Your point about people having different motivations in taking this particular class is legitimate. However, I’d argue that a large percentage of the class is not taking it because they are merely curious, but because it is an important requirement for their degree or certificate, and presumably this holds true in other programs across the country.
3. My understanding is that there are several prerequisites for this particular course. However, as I pointed out in my introductory comments, above, my arguments are not about just this class: my position is about striving to set a higher bar for programs across the entire country, and especially for people seeking credentials in finance. In that sense, focusing on the particulars of just this class misses the bigger picture and may be an example of taking my comments too personally.
The notion that it’s okay for finance professionals not to care about financial markets or portfolio management seems dangerously short-sighted to me. Finance concepts tend to be more interrelated than your comment implies. A suggestion that a person engaged in corporate finance doesn’t need to know anything about trading even basic stocks strikes me as somewhat naïve, but you are, of course, entitled to your opinion.
On a more personal note, my hope is that the experiences we shared in the Advanced Portfolio Management class helped to prepare students more adequately for professional and personal finance challenges. I welcome student feedback aimed at improving future classes.