A few months ago I found myself teaching third-year students for about one hour on the historical experience of stocks and bonds in relation to the risk/return characteristics. I’m sure most people who have taught finance will have come across these phenomena, where one finds oneself referring to a for the students historical but in ones own case very pertinent event, in my case the 1987 crash, and looking up realizing that this is so far beyond the life abd professional experience of the students that you may as well be talking about the reforms of the Roman bureaucracy by the Emperor Titus.
We know that people generally speaking tend to engage in what financial economists call “hyperbolic discounting”, which applies both to the past as well as the future, resulting in a shorter term perception, giving greater weight, greater than would be appropriate given the distribution of outcomes, to more recent events. This also manifests itself in a number of other financial and behavioral biases. The bottom line is that there is always a tendency for people to consider that this time really is something new. And of course, this flies in the face of what we know from history. Probably the best book on economics and finance over last couple of years has been the book by Reinhard / Rogoff ” this time is different”, credit should know, it’s almost certainly not. In my view this book should be compulsory reading for anybody who thinks about being involved in financial and economic markets at any level. In my case the 1987 crash was memorable, of course as a major event in finance, and also because on that Monday I started work on the Central bank of Ireland.
This memory, and the realization that for many students, and don’t forget them in a couple of years these students will be the ones that will be managing your money, and knowledge of financial, business, or even economic history, is lacking. Earlier this year a study was undertaken by the St Paul’s Institute, which looked at the economic and financial historical knowledge of London finance professionals. The full study, available here, is a fascinating read about the attitudes of finance professionals in the city of London around the areas of ethics and integrity. What was reported widely, see for example an interesting report here, was a city professionals exhibited a profound lack of knowledge around the economic and financial history of the own profession. Quoting from the London Independent
In an indication that memories fade fast within the banking sector, less than a third of employees were able to pin point 1980 and 1991/92 as the last two dates major recessions took place in the UK. In contrast, more than three-quarters of respondents correctly answered that the post-credit crunch recession began in 2008.
Equally, almost seven in 10 people had no idea that this year is the 25th anniversary of the “Big Bang”, the major deregulation of Britain’s banking industry that allowed London to become the financial capital of the world – and an inevitable epicentre of the ongoing economic turmoil.
To me this is profoundly worrying. The words of George Orwell are very apt: he who controls the past controls the future. And it’s not just me that worried…the CFA Institute, the professional body that certifies and regulates the “front office” portfolio and institutional managers, is reported today in in the financial Times as also being concerned. The report is behind the financial Times registration barrier, registration is free, and provides limited access to a number of articles per month. Nonetheless, some quotes from it are illustrative.
CFA UK, which represents 9,000 investment professionals, argues that the study of financial history should form a major part of all compulsory education for retail and wholesale investment professionals. “Financial amnesia disarms individuals, the market and the regulator,” the body said. “It causes risk to be mispriced, bubbles to develop and crises to break.”
The education requirements for investment professionals in the UK do not oblige them to have “any understanding of financial history”, added Will Goodhart, chief executive of CFA UK. While the UK’s Financial Services Authority sets the framework for the Investment Management Certificate, the country’s most widely recognised qualification for investment professionals, CFA UK sets the questions. Mr Goodhart suggested that about 15 per cent of the syllabus focus on financial history.
The British CFA programme should be reformed to include “a practical history of financial markets, designed to remind us about the effects of liquidity, psychology and regulatory failure”, the report said.
It also advised the boards of financial institutions to undertake an annual “amnesia check”. “It would be reassuring to know that once a year the board of a financial services firm had reminded itself that this time it is not different,” Mr Goodhart said. The
The CFA Institute have a relationship with the number, about 100, universities where they provide input into Masters level degrees in finance The idea here is that the Masters in finance cover much of the ground of the professional qualifications of the CFA Institute, although no exemptions are given, and that they therefore provide both an academically rigorous as well as industry focused experience for students. Trinity College Dublin and University College Dublin are the only two such universities in Ireland which have courses so aligned. The MSc in finance in Trinity College, and the MBS in finance in UCD are the relevant courses. It’s instructive to note that examining the syllabi for these courses there appears to be no opportunity for students to study financial history. I should note that the initial design of the MSc in finance and Trinity College was mine, and therefore I should take some responsibility for not having included as an optional module, ab initio, a module on financial and economic history. In my defense I can note that there was a proposal the following year have such a module, but it was not felt that there would be sufficient numbers of students interested to warrant offering the course. And, the sad fact is, that this is probably the case. Students who have never been exposed to history are not likely to have an inherent appreciation of the importance of history.
What about other courses? I am the external examiner for the Masters in financial economics at University College Cork, and it is an excellent course of course, but it does not have a module on financial history. The University of Limerick offer a wonderful degree at Masters level in computational finance, the Masters In finance and capital markets in Dublin city University has been on the go for a number of decades and again provides excellent training, and there is a recently developed masters in financial engineering at NUIM. None of these, insofar as I can see from examining the course lists online, offer students a module in financial history.
it doesn’t seem to be any better in economics. The TCD masters in economics does not appear to have a module available on financial or economic history; nor does the largest masters in economics degree course, that run by UCD. This also seems to be the case in NUIM, and in Cork.
What about MBA degrees? If our financial and economic professionals were not been trained in a manner, which incorporates as a formal module and understanding of history perhaps, business masters of the universe are so being taught? Again from my knowledge there is no such module on the MBA Trinity , nor on the MBA offered in UCD, despite it being the only MBA in Ireland which is “triple accredited” and the only MBA in Ireland ranked in the Financial Times rankings. In fact the only mention of history on the UCD MBA site appears to be in the promotional brochure outlining the history of Dublin.
I haven’t looked at the situation in UK, USA. That would be an interesting master’s thesis, for a student to examine attitudes and approaches to the incorporation of financial and economic history into graduate professional training programs. But I am pretty certain that situation which I have described here in Ireland is representative of the vast majority of courses. The teaching of economic and financial history has never been a core strength, particularly in Ireland, of business schools. Even within economics departments economic history, still less the history of economic thought, has tended to be a very minority sport. Ireland in recent years has been blessed in having exceptionally talented economic historians, such as Kevin O’Rourke in TCD, and Morgan Kelly and Cormac O’Grada in UCD . Kevin has now left Trinity College, has taken a professorship at All Souls College Oxford; Cormac has retired; Morgan showed in his analysis of the economic crisis the benefits which a good grounding in historical concepts can provide.
The reality is that as people move and retire they are unlikely to be replaced, certainly not the same levels, and given that it takes decades of dedicated skill to achieve the levels of knowledge then certainly not at the same level, ab initio, in terms of intellectual firepower. Yet, who can doubt that a greater knowledge of history would be useful? Who can doubt that were people, particularly those entrusted with our financial and economic well-being, more aware of the cycles of the economy and of the markets, that they would be at least better armed in relation to realizing that this time is not different, and that by observing and learning from the past we can at least not be excused the knowledge that “we never knew this could happen”. Of course, there are no smart green nano bots, no patents, and very few high-tech spin-offs that come from providing economic and financial history courses. And therefore, given the dreadful trudge towards turning universities into some form of annex to an ill-defined “Smart economy” we will continue to churn out highly technically skilled economic and financial graduates whose only exposure to economic and financial history has come about through individual course leaders dropping nuggets of information into their courses, or for the select few more so motivated, from their own autodidactic endeavors. And that is one way to ensure that we have a dumb economy and one that is doomed to prove Santayana right : Those who cannot remember the past are condemned to repeat it.