At the recent Make Markets Be Markets conference, I got to ask a questions of the esteemed panel — Joseph Sitglitz, George Soros, Jim Chanos, Simon Johnson, Elizabeth Warren, etc.
That question was simply this:
Why do Bad Ideas seems to persist for so long? How do certain concepts hang around, long after they have been disproven?
The answers were unsatisfying.
Which brings me to this question for any graduate students, undergraduates and even college Professors: What bad economic or financial ideas are being currently taught in your departments?
Perhaps its the usual nonsense about the rational profit maximizing homo economicus; Maybe its the wonders of Deregulation, and its bastard cousin Self regulation. The Efficient Market Hypothesis is a perennial favorite amongst the tenured set. And any sort of deification of markets also qualifies.
So, college students of America (or their parents), what can you tell me?
I teach as an Adjunct at a NY university and have to note the consistently anti-business bias among my peers and students. They cannot accept the recent Supreme Court decision affirming Corporations’ free speech rights, much less rights as a “person” in general. The corporation is characterized as a “psychopath” — having “an inability to feel concern, empathy, guilt or remorse.” <– taken from class presentation. While that much is perhaps true, the inappropriate implication is that corporations, business generally, and the capitalist system are evil. Our economy depends upon business and growth. I do NOT find any worship of deregulation or belief in free markets (Labor unions represent the faculty!) Rather, in academe, I find a strong anti-business bias, a general ignorance about productive economic activity, but an unquestioning belief in the institutions of government.
As a parent, and a University faculty member, I can tell you it has been a gradual erosion of social values since WWII. IMHO the clearest transition is from Becker to Friedman. Micro argued against monopoly and oligopoly, for the little guy consumer. Value grows wealth. Friedman said “screw you little guys” it’s about protecting elite assets and those in power. Control grows wealth for the elites. Ask Chile how that worked out.
Today’s students seem to have very limited notions of social obligation.
And Soros, the superficial enigma, is the perfect example.
He has no qualms whatsoever about capturing billions playing hedges, exchange rates, and commodities. With insider information. One way or another he’s daily raping lots of little guys. Zero sum game.
So what does he do? He funds organizations to continue to give the little guy hope so that he can continue to rape them without social revolution, and pretend to have a social conscience. One penny on the dollar. Cheapo.
So the bottom line is the bad ideas being taught are that corporations and market players, particularly commodity players, are socially sterile profit maximizers above the law.
Professor Robert Shiller’s course entitled Financial Markets is available online via Yale University’s Open Courses initiative. It may give you a first hand peek into what is being taught at Yale, at least.
http://oyc.yale.edu/economics/financial-markets/content/downloads
John Quiggin’s new book Zombie Economics (ideas that will not die) covers this exact territory see e.g. http://zombiecon.wikidot.com/
Barry, first time long time. Love the site. The worst idea taught in school is that there will be a job waiting for you when you get out.
The usual suspects are still taught and worshiped – dividend discount model, CAPM, intrinsic value, efficient market theory – all concepts that assume that forecasting future cash flows is easy and correlations remain constant. Some instructors admit that some of the concepts are old and flawed, but then add then we have to know them. In my financial strategy class, the main book we are discussing is Random Walk on Wall Street. As far as I know, this hasn’t changed for years. I am fortunate that my professor is open minded and allowed me to make a presentation on Trend following. It is always useful to get acquainted with several different perspectives.
Probably deliberate misdirection. Markets are of 2 types – growing the pie or stealing a piece of someone else’s. Growing the pie takes is what productivity is really about. Stealing pie from others is what financial institutions do with their thinly veiled “innovation”, which is not really producing anything at all. Perpetuating bad ideas just means you can fool a larger section of the crowd when the time comes to “innovate”, and steal with impunity.
Good post Barry…I think this almost everyday while in class. Not only do I feel that I waste time learning these things, but I have learned more by reading your blog than I have in all my classes combined (through 4 years).
CAPM and the EMT clearly have little use and the only reason it is still taught is because of the cult of academics teaching it and the strict curriculum that accredit business schools must follow. The one finance professor I know of that actually gets it (behavioral finance) is Robert Haugen, who wrote a book the Inefficient Stock Market, which Barry recommends.
Most of my friends in business programs are taught similar material, but I wonder if any schools actually deviate from the norm. My guess is Syracuse University’s Whitman School of Management is doing something right…wish I went there.
I read a James Montier interview the other day and he said that students and investors would be better off reading investing history books about human nature than studying for the CFA. He is right, but unfortunately we live in a society that rewards credentials not common sense. Not that I know much about the CFA, and will probably take it in the future…
Two memories stand out from my MBA schooling. The first was Finance teachers emphasizing the benefits of generating capital by selling bonds as well as stock so as to leverage up return. This is all fine and dandy, but the risks involved in taking on such debt were never discussed.
Second, the capstone of the program was a simulation where we were assigned into groups to run our own companies. We started with certain assumptions: sales, factory capacity, etc. Each week we were given updated sales figures, economic data and so forth. For nine weeks we could add overtime shifts, add production lines, new plants, export to other markets, etc. by spending our capital. A great concept, but guess what; during the entire 9-week period, sales went straight up as the simulated economy just keep on getting better. The teams that "won" were the ones that spend every last dime on continual expansion. The students were being prepped for a "Goldilocks" world. Is it any wonder we are in trouble?
Luckily, I learned to distrust authority figures back in kindergarten when, on the first day, going over the basics, the teacher told us that it should never be necessary to use more than two sheets of toilet paper.
I go to the University of Michigan – Dearborn. It’s like the uncultured younger brother who hustles instead of reads when compared to the much more popular UofM – Ann Arbor.
Many of the theories they teach in my financial/economic courses seem incomplete to me. For instance, the efficient market hypothesis claims that our markets will reflect all relevant information. However this does nothing to propagate the idea that what’s really important about information is whose hands it’s in. I think of it more like a weighted-average. In other words, it is entirely possible for very valuable information to be known and yet not be reflected in the markets to the extent that it should be if the people with that information cannot enact a large number of trades on its behalf. The most simple argument against the very foundation of macroeconomics is the existence of hedge funds and their exploitation of arbitrage opportunities. Profs will the counter that all arbitrage opportunities disappear in the long run. But we all know the long run is Keynes’ bitch
A general idea about our economic models is that they do not make the necessary extensions into psychology, sociology, anthropology, etc. Behavioral finance is a much larger force than I think equations and models allude to. If we could understand human behavior we would understand the driving forces of markets, economies, etc, at least on a level we are responsible for. Shiller is the Mandela of the movement, with you (Barry) like a hired gun. But until these ideas are expanded into normal universities, the average finance/econ grad will be too reliant on old (unsuccessful) models and attitudes.
Sorry BR, the question is both unanswerable in the sense you likely meant it — as in why do we repeat mistakes — and yet rather trivial: To paraphrase an old soldier, a metaphysics never dies, it just fades away; it might happen faster in the physical sciences than it does elsewhere but cultural practice defines the human and no human will readily subtract from themselves unless the cost of sustaining is more than they can bear.
As I’m sure you know, surviving a rigorous graduate program requires more than merely memorizing sources, it is a way of thinking and ways of thinking require assumptions which in turn are grounded in root metaphors: Ontology recapitulates epistemology, eh?
From a current MBA student graduating in a couple of months…
In our required course on business ethics last Spring, the assistant dean of the program and professor of the class made the following assertions…
1. If a group of people like the bankers crashed into a ditch, wouldn’t the right thing to do is to offer to help them (by bailing them out)?
2. The compensation packages for the bankers are sacrosanct because a contract was signed. And besides, everyone knows that these individuals are as talented as professional sports athletes and rock stars. How would their companies be able to compete for talent if they couldn’t offer competitive compensation packages?
These pieces of wisdom came from the mouth of a man who had made his name working at the Federal Reserve. Never once did he nor any of my MBA classmates bring up the idea that maybe, just maybe, the right thing to do would be to stand the bankers up against a wall and offer them a blindfold and cigarette. Since clearly a group of people who get paid lots of money obviously deserve it and would never act in such a way as to selfishly benefit themselves while destroying everyone else.
I got the same lesson about debt vs. equity. The professor dismissed any concerns about the risk of debt by stating that if a company were to take on too much debt, the market would recognize this and require higher and higher interest rates until further debt financing became unviable.
The notion that “the market” and the various players might be biased towards issuing debt for their own reasons and that the purchasers of that debt might be the suckers who get fooled was not even considered. Again, “the market” would surely punish financiers, investment bankers and ratings agencies that failed to provide sufficient information…
Zombie Economics looks like a winner http://zombiecon.wikidot.com/
1. Introduction 2. The Great Moderation 3. The Efficient Markets Hypothesis 4. Micro-based macro 5. Trickle down 6. Privatization 7. Economics for the 21st Century
The notion that risk and return should be analyzed separately is probably the single biggest bad idea being perpetuated in academia.
This university professor — NOT an economist — is teaching institutional economics (Hodgson, et al) and Lindblom’s The Market System this term. More accessible and immediately useful than Marx for my students. Most free market types have never bothered to read Smith closely. If they have read him, they have not read the full body of his work and do not understand him. It is not uncommon for the ideas of European thinkers to move (rightward) as they cross the Atlantic. Most of what passes for mainstream economics is either fiction or fantasy.
Eric,
I disagree, but for a subtle reason. RISK is generally not taught much you are taught that the risk of any investment is going to be perfectly reflected in the price, because the market is perfect and will appropriately reflect the risk in the return of the project. As was the case with MBS price modeling, the presumption is that you don’t need to do risk analysis, because the perfect market will price it for you.
“Risk” in an MBA program is mostly discussed in terms of Beta, or variability from the market, not the kinds of true accounting risks that we really need to be concerned with.
In fact, I would suggest that the one of The Biggest Lies is “Risk = Beta”.
I don’t know if it’s taught in schools, but one of the big fallacies is that the American worker can compete with anyone if given a level playing field.
Maybe it’s true, only they neglect to add that the level playing field is below sea level.
Recent MBA here also a self taught Austrian Economists (sorta) and someone obsessed with LTCM and how that firm failed. I get weird little obsessions that I learn as much as I can about and then never use the information again. Ask me anything about the 1982 Celtics and I know it. Sadly. Anyway my biz school had a finance prof. who I took a bunch of classes with mostly because the school thought he was a rock star but in reality he just had a big ego and a lot of connections to help students – not that he liked/hooked me up. Here’s why: As an accelerated JD/MBA I averaged about 4 hrs of sleep each night while not really caring what people thought of me (great attitude huh). So when he’s setting up a problem and assuming EMH – I asked him “But what if the markets aren’t Efficient?” After about a 2 min discussion he asked me “how many Nobel prizes do you have?” “well the guy who invented this has one so I’ll go with him.” I asked him could he demonstrate this without EMH to which he said “If you don’t want to participate in this class you are free to leave…There’s the door” I should have walked out but I just shut up and sat there.
Either way once academia has their mind made on a certain issue they must defend it. IMHO the time lag between old ideas being shuffled out and the new ones coming in is at least partially due to the vested interested of the people who make money based on their ability to propagate these ideas. Here this prof made his bones explaining the world assuming EMH. If you take that away all of his years of education and experience simply using quantitative analysis to evaluate markets then you are attackin his very being. He will due everything in his power to defend this and if he has power in the hiring process guess who is coming in the door next. Another EMH Prof.
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