After introducing the MFin to a group of new joiners to Cambridge Judge Business School last week, one asked me whether we on the MFin were actually trying to change the finance industry?
I think his unspoken assumption was that the industry needs changing, and that if we teach students the same old finance stuff then we are contributing to the continuation of a flawed model. It’s a good question. We describe the MFin as academically rigorous and commercially relevant. So we teach what academic research has discovered, within the limits of what can be known with any confidence in a social science. And we try to reflect what actually happens out there in practical finance, emphasising good practice.
But is this enough? A few readers may have heard a once-famous saying by a German writer called Karl Marx: “The philosophers have only interpreted the world, in various ways. The point, however, is to change it.” These words (which are inscribed on Marx’s very grand Victorian tombstone in Highgate Cemetery in north London) are from Marx’s commentary on another German philosopher, Ludwig Feuerbach, who wrote an influential critique of Christianity in 1841. Marx and Feuerbach both argued for action, rather than academic detachment. There is certainly a moral argument for saying that if you know something is wrong and you have the power to influence other people, you should do so.
But we in finance lack the certainty of Marx (whose confidence in his solutions to the problems of capitalism was excessive – he didn’t live to see the calamitous results in Russia and China). The goal of finance should be to achieve the success of medicine, a discipline that harnesses academic research to real human needs, and which has achieved astonishing successes. Finance is, alas, a very long way from that success.
I said in my talk that I believe that finance, if done well, is a valuable activity. I meant “well” in the twin sense of “competently” and “ethically”. Both of these words raise difficulties. For many of the problems in finance (e.g. how to arrange pensions, how to finance companies effectively, how to finance infrastructure) we have a lot of theory and some experience which at the very least narrow the range of sensible policy options. But we lack the knowledge of an engineer asked to construct a crossing over a river. The reason that bridges rarely fall down but financial crises recur is that engineers have a cumulative body of knowledge that reduces the risk of future errors, except when they do something pioneering – and even then they build on proven designs. Finance learns much more slowly and sometimes we forget the lessons of earlier times through a failure to study financial history. Finance solutions are rarely entirely technical – they intersect with political and legal realities and genuine differences of moral opinion. Finance theory can certainly help but it cannot yet offer the technical competence of engineering.
As for the ethical side, finance is no more inherently unethical than any other area of business. But it does have greater opportunities for the unscrupulous, especially in retail products. Ordinary customers of financial services face the asymmetric information problem of a client of a law or accounting firm but without the reassurance (not always justified) that there is a professional body of knowledge administered in a professional way. This is one reason why retail finance is heavily regulated.
So how should a degree like the MFin approach these things? Much as I wish we had the truth that could transform the finance industry, we don’t. And we should be honest about our lack of knowledge. I may have my own views about the way the industry works and how it should be regulated but it would be unforgivably overconfident of me to impose these on other people. Instead we have to teach what is known about finance, the body of knowledge that has passed the test of time so far, but accept that it is provisional and imperfect. Our somewhat difficult course on the Economic Foundations of Finance is there to remind students of the limiting and unrealistic assumptions of rational human action that underpin all mainstream finance. Behavioural finance has shown just how limiting these assumptions are but it has not offered a practical alternative to rebuilding the subject.
I firmly believe that learning finance better will lead to better finance outcomes, so long as the sin of over-confidence is avoided. It’s hard for engineers and natural scientists to get used to the messy, fuzzy reality of practical finance, which is an unavoidable result of having to work with people, rather than molecules. As another great German philosopher, Immanuel Kant, said, “Out of the crooked timber of humanity, no straight thing was ever made.”